By Randy Loving, CFA
Many people define investment risk as: How much of this money can I lose if things go wrong? But as one steps back and looks at the totality of investments – “portfolio” – risk can be defined as not achieving a specific goal. However, the goal of investing can differ for each type of investor. For example:
- For a pension plan, risk is usually thought of as not achieving a return needed to fund the obligations to its pensioners.
- For a mutual fund manager or investor, risk is simply a deviation from a set benchmark. When investors see mutual fund returns deviate too far below a benchmark’s return, they tend to pull the assets.
Calculating Risk
For the families that we work with at MONTAG, risk is personal and unique. For some investors, the risk is taken to generate needed income. For others, risk may come in the form of a significant investment in one stock that will dominate the returns of a family’s investments. Over our 40 years, we have worked with all different types of risk seekers, ranging from extremely risk averse portfolios only invested in U.S. Treasuries all the way out to high-risk portfolios geared for maximum capital appreciation.
Investment Management vs Portfolio Management
At MONTAG, the focus of our work is to combine several types of investments to achieve the client’s investment objective. We believe this is the difference between an investment manager and a portfolio manager. An investment manager tends to focus on one asset class or one investing style. He or she will seek to get the best return from this one type of investing. At MONTAG, we expect that different asset classes and investing styles perform very differently over time. Investing in more than one asset class or style can reduce the volatility of a portfolio while still allowing for each asset class to have high returns over the long term, albeit at different times. Investing in different styles and strategies can lower the ‘risk’ or volatility relative to a benchmark and also on an absolute return basis.
Portfolio Diversification
At MONTAG, we approach portfolio diversification in ways that other managers do not. We are careful to construct investments so that they are not overly biased toward any one style of investing. We are free to mix together individual stocks, bonds, and exchange-traded funds to meet client return needs, income needs, and individual risk tolerance. Mixing together different asset classes to achieve client goals is “portfolio management”. We are careful to select securities that do not all share the same characteristics, which helps to smooth investment returns.
The point is that an “investment manager” will focus on one investing style or asset class, such as “small cap” or “growth” or mid-cap, etc., and ride out the ups and downs of the performance of their chosen corner of the market. A “portfolio manager,” like those here at MONTAG, will look at all the asset classes available, develop customized investment objectives with a client, and invest in the appropriate asset classes for the client’s situation. This diversification allows the client to meet their investing goals while smoothing investing returns over time.
The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
