The Art of Risk Management
The essence of investment management lies in risk management rather than yield management. All well-managed portfolios operate according to this principle. This statement was featured in “The Intelligent Investor” book by the US investor Benjamin Graham who emphasized that a successful investment begins with a strategy to manage risk and minimize it. Investors should not avoid investing because of risk, but accept that any investment has a certain level of risk and decide whether the expected return is worth this risk.
Briefly, we must understand the level of risk and expected returns when making an investment decision, as the appropriate mix will contribute to achieving your financial goals. Some investors might prefer low-risk assets, while others accept higher risk to achieve higher returns.
Venture Capital… the Risk and How to Manage It
We can invest in many financial and investment instruments with various levels of risk and return. Some assets have low risk and returns, while others deliver higher returns with higher risk.
Venture capital is an opportunity to achieve high, attractive returns by investing in small companies with an exceptional growth potential but come with a high level of risk. Risks related to such investments are not limited to a potential loss of capital. They tend to be highly illiquid with limited potential to convert them to cash quickly at a suitable price.
Venture capital investors wait for an exit opportunity by selling the entire company, going for an initial public offering or selling their stake directly to a potential buyer. This process usually takes years, which worries inexperienced investors.
This leads us to two main interrelated concepts: asset allocation and diversification.
Asset Allocation
A well-designed investment portfolio mitigates the impact of avoidable risks and increases the expected returns within the risk tolerance of the investor.
The asset allocation process aims to achieve balance by allocating capital to key asset classes, including public and private equities, venture capital, real estate, private debt and others. Each asset class has a different level of risk and return, and the performance of each class varies over time. When the value of one asset increases, the value of another decreases or remains the same.
Determining the right mix of investments in your financial portfolio is very important. Determining the percentage of each asset class is not an easy task, especially for inexperienced investors. The structure of the financial portfolio and the capital distribution needs to be changed from time to time to adapt to market changes. For example, some may increase their investments in safer assets, such as private debt, when they approach retirement.
Don't Put all Your Eggs in One Basket
Diversification is among the risk management techniques for financial portfolios to mitigate the impact of any asset in the portfolio on the overall performance to and reduces portfolio risks. Three main practices help you better diversify your investments.
First, your financial portfolio must include different investment products, such as public and private equities, debt, real estate and venture capital. Second, risks in the same asset class must be diversified by choosing investments with various levels of risk to ensure that the losses of some investments are offset by the gains of others. Third, it’s important to diversify your investments by sectors and geographies so that your portfolio includes non-correlated investments in terms of performance.
Finally, although diversification is the most important and effective factor to achieve your long-term financial goals with the least possible risk, it is not a guarantee against loss because any investment involves risk.
The Family Office: How to Achieve the Magical Equation Between the Highest Returns and Lowest Risks?
In the Gulf market, The Family Office, a wealth management company headquartered in Bahrain, stands out among the most prominent providers of customized investment portfolio solutions by providing various investment options to clients, such as private equity, private debt, real estate, etc.
Investment in high-quality assets is among the most effective ways to protect and grow the wealth of families and individuals. In this regard, the team of investment experts at The Family Office tailors financial plans for the specific needs of clients and their families. The team also helps clients achieve their aspirations and provide meaningful income for them and their families and provides a comprehensive service free of complications and pressure, taking into account the cultural and religious aspects and lifestyles.
Whether you wish to preserve your wealth, plan for retirement, or diversify your investments, the expert financial advisors of The Family Office work transparently to build a customized portfolio that fits your financial goals and helps you reduce risks without sacrificing returns.
For more information about the investment solutions of The Family Office, please join the digital investment platform the company launched at the beginning of 2022 as the first-of-its-kind digital platform for wealth management in the GCC. This platform allows investors to discover global investment opportunities in private markets, build a customized portfolio and simulate its performance for more than 10 years. Investors can also access a number of insights and investment analytics simply by creating an account on this innovative platform. They also access global opportunities that were usually limited to major investors and build a portfolio corresponding to their investment style and risk appetite.
Sign up to our platform on the following link: Join our platform.
Sources: Argaam
Book: Analytical Corporate Finance
Book: The Intelligent Investor
Book: Modern Portfolio Theory and Investment Analysis
About The Family Office:
The Family Office in Bahrain and its Riyadh-based wealth manager, The Family Office International Investment Company, are regulated by the Central Bank of Bahrain and the Capital Market Authority of Saudi Arabia, serving hundreds of family and individual investors. The firm helps clients achieve their wealth goals through custom-made investment strategies that cater to their unique needs.
Disclaimer:
The Family Office Co. BSC (c) is a Category 1 Investment Firm regulated by the Central Bank of Bahrain, C.R. No. 53871 dated 21/6/2004. Paid Up Capital: $10.000.000. The Family Office Co. BSC (c) only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.
The Family Office International Investment is a joint-stock closed company owned by one person. Paid-up capital: SAR 20 million. CR No. 7007701696. It was licensed by the Capital Market Authority (No. 17-182-30) to carry out arranging, advisory and managing investments and operating funds, with respect to securities.
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