Helping Expats Help Themselves

A Revolution in expat finance

risk

Risk

what does it mean to you?

Risk profiling allows investors to establish their desired exposure to risk. It’s a process that should tests the investor’s capacity to deal with volatility. It should also help you determine your growth expectations relative to accepted risk. Unrealistic growth expectation are one of the biggest risks an investor faces.
 
Unfortunately in the past risk profiling tools have been somewhat limited. They were too simplistic in their definitions of risk. This became very clear in the 08 financial crisis. There’s also a question about the reliance on standard deviation in risk assessment. This is a measure of how much a investment is away from the average. It differs over time and offers little insight into the quality of an asset.
 
Today risk profiling tools have made significant progress. Today psychometric profiling plays an enormous part in calculating risk profile. They also help establish any gaps between acceptable risk and performance expectations. They use real performance data establishing acceptable performance ranges for your profile.

make more of your money

Direct Expat has years of experience and knowledge of dealing with expats and their finances. We've published a clear and concise guide to help expats make the most of their money. It's yours free of charge when you sign up for Direct Expat's updates.

Risk Profiling

Get your bespoke risk profile and start investing in the right way for you!

element of risk

risk required

This takes into account the resources that you’ve available and the financial goals that you’ve set.

risk capacity

This is the amount of risk that you can afford to take given the resources that you have available.

risk tolerance

This is the investors emotional ability to deal with financial risk.

Putting it together

All three play are important parts of the risk profiling process. Risk required & capacity are bother measurable through quantitative analysis. Whilst risk tolerance requires a psychometric approach.
 
Conflicts between them are not uncommon and you should deal with them at the start. This means that you are starting with the right investment approach for you. This prevents you making unecessary changes because you’re uncomfortable if markets are volatile.

self sabotage

Risk tolerance is the biggest issue as all logic heads out of the window when things take a turn for the worst. Our animal brains kick in and we deploy our survival strategies to deal with losses. We’re programmed to have a greater emotional reactions to losses than we are for gains. This relates to the performance of the portfolio and individual assets. Even if the portfolio is growing we react to losses from individual conponents. Timeframe goes out of the window and we react to the red on any statements. We sell the offending assets and change the risk profile of the portfolio.

You can do it!

There’s one investment area where we take a more rational approach to investment. When we invest in property and the market starts to fall (and they are usually big falls) we don’t panic. You may read that properties have fallen by 40% where you live and you wouldn’t immediately try to sell it. It wouldn’t matter if we were losing money on the property either we’d sit it out. Hey and let’s not beat about the bush if we’ve got a mortgage then being in negative equity is risky. Though when we need to we have it within us to take a practical approach to the most difficult conditions.

The right approach

We have no idea why there’s a disconnect between our attitude to losses in property and other investment markets. Getting our risk profile right and buy quality assets will work for us. When markets start to fall, letting assets recover is the best approach.
 
Taking a broad approach rather than using individual companies means our portfolio recovers. Investing in index trackers for example is a good example. Companies go out of business even the very biggest. When was the last time an index didn’t recover it’s losses?
 

make more of your money

Direct Expat has years of experience and knowledge of dealing with expats and their finances. We've published a clear and concise guide to help expats make the most of their money. It's yours free of charge when you sign up for Direct Expat's updates.

Risk Profiling

Get your bespoke risk profile and start investing in the right way for you!

rebalance

As your portfolio grows individual assets will do so at different rates. This means your investment inline with your risk profile anymore. It may be that your portfolio is now too aggressive or more conservative that it should be. It’s important that you deal with this and you bring it back to your risk profile again.
 
We do this through rebalancing. We have a risk profile so we’ll be using a model portfolio. This gives us the percentage split for the assets that we hold. When we rebalance we sell and buy assets to bring our portfolio back to the model. If the model states that an asset should make up 10% of the portfolio and it now makes up 12%, then we sell the extra 2%. If the model states that an asset should make up 5% of the portfolio and now it makes up 3% then we put another 2% into it. We do this for all the holdings in our portfolio until it matches the model again.
 
Rebalancing is an essential part of a successful investment strategy. Make sure that you do it. Once a year is enough more often is overkill and less frequently will cause you problems in the long run.