Fortworth AG

At Fortworth everything starts with data and a disciplined methodology underlies everything we do. All our processes are based on a continuous activity of design, test, refine, repeat and rigorous risk management.

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Risk management is an important aspect of our wealth management advisory because it's an essential component of successful investing, enabling investors to navigate uncertainties, protect their capital, and pursue their financial goals with greater confidence. It involves identifying, assessing, and mitigating potential risks associated with investment decisions to protect capital and maximize returns. Here are a few reasons why risk management is important in investing:

 

• Preservation of Capital: Effective risk management helps protect the capital invested. By identifying and addressing potential risks, investors can reduce the likelihood of significant losses and safeguard their investment portfolios.

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• Maximizing Returns: Risk and return are closely intertwined in investing. By managing risks appropriately, investors can strike a balance between potential returns and the level of risk they are comfortable with. This allows them to optimize their investment strategies and pursue the highest possible returns within their risk tolerance.

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• Diversification: Risk management often involves diversifying investments across different asset classes, sectors, and geographical regions. Diversification helps reduce the impact of individual investment losses by spreading the risk across a variety of holdings. It can enhance portfolio stability and protect against the volatility of any single investment.

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• Long-Term Sustainability: Risk management is crucial for the long-term sustainability of an investment portfolio. By addressing risks proactively, investors can avoid significant setbacks that may disrupt their financial goals. This includes being prepared for potential market downturns, economic uncertainties, or unexpected events that can impact investment performance.

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• Peace of Mind: Effective risk management provides investors with peace of mind. By understanding the risks associated with their investments and implementing strategies to manage those risks, investors can feel more confident and make informed decisions. This reduces anxiety and allows them to stay focused on their long-term investment objectives.

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TYPES OF INVESTMENT RISKS

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There are five key types of investment risks:

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• Market Risk: Market risk refers to the possibility of investment losses resulting from changes in market conditions, such as fluctuations in stock prices, interest rates, or foreign exchange rates. It affects nearly all investments and is driven by factors beyond an investor's control.​​​

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• Credit Risk: Credit risk is the potential for losses arising from the failure of a borrower or issuer to fulfill their financial obligations. It primarily applies to bonds, loans, and other fixed-income investments, and can result from factors like default, bankruptcy, or downgraded credit ratings.​

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• Liquidity Risk: Liquidity risk refers to the difficulty of buying or selling an investment quickly without causing a significant impact on its price. Investments with low liquidity may be harder to sell, potentially resulting in higher transaction costs or an inability to exit a position at a desired time.

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• Operational Risk: Operational risk arises from the potential for losses resulting from inadequate or failed internal processes, systems, or human factors. It encompasses risks related to errors, fraud, legal and compliance issues, technology failures, and other operational deficiencies that can impact investment performance.

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• Model Risk: Model risk refers to the potential inaccuracies or limitations of mathematical or statistical models used in investment decision-making. Models are used to predict or estimate various aspects of investments, and model risk arises from the possibility of flawed assumptions, data inputs, or flawed modeling techniques leading to incorrect conclusions or decisions.

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RISK ASSESSMENT AND RISK TOLERANCE

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Both risk assessment and risk tolerance are integral components of the investment process. 

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• Risk Assessment Methods. Risk assessment involves evaluating the potential risks associated with an investment, such as market volatility, credit defaults, liquidity constraints, operational failures, and model inaccuracies. By conducting a thorough risk assessment, investors can identify and understand the risks they may face, allowing them to make more informed decisions. To assess these risks systematically, there are Quantitative Methods and Risk Metrics that provide investors with tools to assess and quantify different types of risks. By employing these techniques, investors can gain insights into potential losses and make informed decisions regarding their investments. It's important to note that risk assessment should consider both the likelihood and potential impact of risks to have a comprehensive understanding of the risk profile. Below ​key types of Quantitative Methods and Risk Metrics:

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• ​Scenario Analysis: This method involves creating hypothetical scenarios that represent different market conditions and analyzing the potential impact on investments. By considering various scenarios, investors can assess how their portfolios would perform under different economic or market circumstances.

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• Sensitivity Analysis: This technique involves examining how changes in specific variables, such as interest rates, exchange rates, or commodity prices, affect investment returns. By quantifying the sensitivity of investments to different factors, investors can better understand the potential risks associated with those variables.

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• Value at Risk (VaR): VaR is a widely used risk metric that estimates the maximum potential loss of an investment or portfolio within a specific time frame and at a given level of confidence. For example, a one-day 95% VaR of $100,000 implies that there is a 5% chance of experiencing losses exceeding $100,000 in a single day.

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• Conditional Value at Risk (CVaR): Also known as expected shortfall, CVaR measures the expected loss beyond the VaR level. While VaR focuses on the maximum potential loss, CVaR provides additional information by averaging the losses that exceed the VaR threshold. It offers a more comprehensive view of potential losses and is useful for capturing tail risks.

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• Conditional Drawdown at Risk (CDaR): CDaR measures the potential losses in an investment or portfolio from its peak value, focusing on drawdowns. It helps investors understand the magnitude of losses during adverse market conditions and captures the risk associated with significant drawdowns.

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• Risk Tolerance. It refers to an investor's ability and willingness to withstand fluctuations or potential losses in their investments. It reflects an individual's comfort level with taking on risk and can vary based on factors such as financial goals, time horizon, investment knowledge, emotional capacity and personal circumstances.

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Integrating risk assessment and risk tolerance is crucial because it helps align investment strategies with an individual's risk preferences and financial objectives. By understanding their risk tolerance, investors can select investments that align with their comfort level, ensuring they are not taking on excessive risk or exposing themselves to undue stress.

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Furthermore, risk assessment and risk tolerance are dynamic and should be periodically reviewed and adjusted as market conditions and personal circumstances change. Regularly reassessing risk profiles helps investors maintain an appropriate balance between risk and potential returns, ensuring their investment strategy remains aligned with their goals and risk tolerance over time.

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Some common approaches to risk management in our advisory include:

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• Diversification: which involves spreading investments across a wide range of asset classes, sectors, and geographic regions. This can help to reduce the impact of any one investment on the overall portfolio, as the risks and returns of different investments tend to be uncorrelated.

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• Asset allocation: which involves the process of determining the optimal mix of different asset classes in a portfolio, based on an investor's risk tolerance and investment goals. By carefully balancing the allocation between different asset classes, we can help our clients to manage risk and optimize returns.

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• Risk budgeting: which involves setting a specific risk budget for each asset class in a portfolio, and allocating capital accordingly. This can help to ensure that the portfolio's overall risk level stays within acceptable limits.

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• Risk management infrastructure: which involves the process of developing and maintaining a robust risk management infrastructure, including risk management policies and procedures, risk reporting systems, and risk management systems and tools.

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• Risk monitoring and review: which involves ongoing monitoring, regularly reviewing and assessing the risks in a portfolio, and taking corrective action if necessary.

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• Comprehensive financial planning: wealth management advisory often involves comprehensive financial planning, which involves analyzing client's financial situation and developing a plan to achieve his financial goals. This can require identifying and mitigating financial risks, such as those related to retirement, estate planning, and insurance.

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This approach allows us to deliver sustainable, long-term and repeatable results. Our first objective is the preservation of our clients' wealth.