Whether or not you are a high-net-worth individual, it's still important to structure your portfolio correctly while appreciating risk management. Obviously, in often volatile markets, this can be difficult to achieve with risk management used as a means of protecting your wealth while also maximising the upside.

 

In this article, we will look at advanced strategies for building resilient and optimised investment portfolios, which, although not immune from market movements, will offer a degree of protection.

 

Strategic asset allocation

 

As we all appreciate, it's critical that you align your asset allocation with your long-term goals, risk tolerance, and investment time horizon. The fact that our long-term goals can change over time means that asset allocation is not a one-time action; it can be pretty fluid, depending on your situation.

 

Strategic asset allocation involves diversity across equities, fixed income, real estate, and a range of alternative investments. While tempting to run with the sectors that are doing well, as we know, these periods of outperformance don't last forever, which is why diversification is priceless. It's important to assess and adjust your strategic asset allocation on a regular basis as your life changes.

 

Tactical asset allocation

 

While strategic asset allocation is often seen as a passive style of investment, tactical asset allocation is more dynamic. As a high-net-worth individual, you may be in a position to capitalise on relatively small market inefficiencies or tactical shifts, which may not always be appropriate for less wealthy individuals. Often carried out in tandem with strategic asset allocation, tactical asset allocation is more of a short-term reaction to market movements.

 

Flexibility is critical with this investment approach, as is the ability to hold your nerve in challenging markets. Whether investing for a short-term bounce—a profitable trade—or with a long-term view, tactical asset allocation is certainly an interesting concept.

 

Risk parity and tail risk hedging

 

As the term suggests, risk parity is an investment strategy based on the allocation of risk rather than capital. This ensures that your investment portfolio is not overly exposed to a particular asset class that may seem attractive from a strategic point of view. The idea is relatively simple: to balance the risk between different asset classes as a means of balancing your overall risk, diversity in its most basic form.

 

Tail risk hedging is an investment strategy which is focused on relatively infrequent but potentially damaging occurrences such as the financial crisis or what are known as "Black Swan" events. This could involve, for example, using options and futures to cover extreme movements, which are often measured as three times the standard deviation. This means that in the event that an asset, on the upside and the downside, were to deviate by more than three times the normal volatility, then tail risk hedging would kick in - providing a degree of cover/protection.

 

Summary

 

There's a lot to consider with investments, whether looking at growth, income, or a balanced portfolio and varying degrees of protection. While we have singled out strategic and tactical asset allocation and also covered risk parity and tail risk hedging, these are not necessarily stand-alone investment strategies. They can all be incorporated to a certain extent to maximise the upside and/or protect on the downside.

 

Normally, risk parity and tail risk hedging are more focused on wealth protection, but they can leverage the upside as well. As always, it's important to take advice from your financial adviser before committing your funds to a particular investment strategy.

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