RISK MANAGEMENT

Risk tolerance is one of the most important aspects of determining client suitability and Schmitz Capital Partners believes in both defining and managing risk.  We believe that risk management is as important as asset allocation strategy and investment selection.  However, risk is subjective and heavily influenced by several factors including current personal circumstances, past investment experiences, temperament, personality and prevailing market conditions.  This subjective nature is precisely what makes risk difficult to quantify and even harder for investors to effectively articulate. 

The recent financial downturn left some investors so cautious they remained firmly rooted on the sidelines, leaving them exposed to opportunity risk.  Others were lulled into the notion that the economy recovered and reverted back into strategies that may have overexposed them to risk.  This crossroads is SCP’s opportunity to have an open and transparent discussion about risk.  Our aim is to help investors understand risk, how it can be effectively incorporated into an investment plan, and steps that need to be taken to manage the risk.

At SCP, we believe that investors often have incomplete or inaccurate views of risk and they don’t always actually invest in ways consistent with their true underlying risk profile because:

  • Risk tolerance is not a physical constant or stable entity…it’s a dynamic variable which changes over time.
  • Each client has a unique barometer for what they perceive to be “risky”.
  • Each client has a different ability, willingness and desire to accept risk.
  • Risk tolerance is often heavily influenced by outside, disinterested parties (i.e. friends, family, media).
  • Investors tend to have an asymmetric view of risk - they are more scared of sustaining losses than they are of missing the opportunity to generate returns.
  • Clients are not always accurate in describing their risk tolerance thresholds. Therefore we have identified both “stated” and “psychological” components to defining risk.
  • Risk carries a “recency effect” (i.e. investors’ most recent investment experiences are often what they expect to happen in the future). In the investment world, this often turns out to be precisely the wrong thing to do.

We believe that the portfolio managers must be responsive to changes in risk at the individual investment level, the portfolio level and to changes in the overall economic and financial markets.   In response, at SCP we attempt to truly understand the client and construct portfolios in accordance with each client’s tolerance for both business risk (non-systematic) and market risk (systematic), tailoring the mix of investments from very conservative, less volatile vehicles to aggressive, more volatile vehicles.  In addition to our careful examination of individual investments, we attempt to further reduce risk by diversifying our client’s portfolios, taking care to limit concentration in any one sector, industry, asset-class or product.

We believe that risk management strategies should also include a review of insurance coverage.  We believe insurance plays vital role in defining risk exposure.  For many clients, it is imperative to have both adequate levels coverage and the right types of insurance to increase the likelihood of achieving your objectives. Without proper risk management strategies in place, even the most carefully crafted investment plans can be completely derailed if the unexpected occurs.

We will perform regular reviews of your situation, to help ensure your goals and current coverage are still aligned.  If they are misaligned, we are able to help you analyze the appropriate choices from multiple providers to help determine what course of action is in your best interest.  We can then execute the plan, serving as the liaison between you and the insurance providers.

**Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.