While our Risk Management process aims to keep up with markets when conditions are stable, it also incorporates downside risk protection to mitigate the threat of capital erosion when the risk of loss is elevated.
Managing portfolio risk levels however can lead to opportunity costs. While our Risk Management process has largely kept up with markets since 2012, we have actively reduced risk over the 12 months even though our quantitative-based risk signals have directed us to increase exposure to growth assets. Our Risk Management process also incorporates qualitative (human) oversight; and our Investment Committee sees elevated momentum (or sentiment-based) risk in this late-stage of the market cycle. As a result, our Risk Profile Models are experiencing short-term underperformance, which we outline in more detail below.
We remain confident in our risk management disciplines and reaffirm the importance of downside risk protection as a key requirement for investors with a strong aversion to capital drawdowns. Failing to address drawdown risk can significantly impair portfolios, especially for many baby boomers who don’t have the luxury of time to wait for markets to recover and who rely on portfolio income to meet their lifestyle needs. The greatest risk for many baby boomers is the prospect of portfolios failing to meet their income needs due to depleting portfolio values. In this regard, drawdown risk management becomes critical.
