Expert's View 名家觀點


十一月 21 , 2015  

The personal aspect of investment risk management

by Charles Cheng, CFA – Clarity Investment Partners
鄭又銓, CFA -可承資本

On June 12th of 2015, the Shanghai Composite Index in China reached a peak level of 5178. Prior to this, news organizations and securities houses reported that Chinese investors had the highest margin levels versus trade-able shares for any stock market recorded in history. In the subsequent weeks, the Shanghai index tumbled, falling to a low of 2851, a decline of over 44%. While the index since rallied back to over the 3500 level, it’s clear that many investors, particularly those that margined too heavily, will have taken losses on their portfolios that will take a long time to recover from, due to misjudging the risks involved in making their investments.


Risk management in investing is generally a poorly understood concept, even among professionals. Most financial advisors will deal with investment risk, if they deal with it at all, by using concepts brought over from academic finance, like standard deviation and correlation, which are easy to use but have flaws in real world application. Most investors only care about whether a particular investment or trade makes or loses money and how much. However, a greater focus on actively thinking about investment risk would benefit everyone’s portfolio, whether they are professional investors or not.


Here, we’ll define three types of risks that are relevant, and how to mitigate them:


1) Risk of permanent loss of capital within the investment

Simply put, this is the risk that the money that either all or most of the capital that you have invested does not come back to you. The most straightforward example is if you buy the shares or the corporate bonds of a company and that company goes out of business. You would not get the money that you invested back, regardless of how long you held the shares or the bond. Another example would be of a structured investment product that would pay off if a certain event occur, but lose money if it did not. This is a risk even for well researched investment ideas, because of the threat of random events like natural or accidental man-made disasters. Even entire countries have caused total losses to their investors (Russian bonds in 1998, China’s stock market in 1949).

1) 在投資中本金永久虧損的風險


Figure 1: Bankruptcy of Suntech Power, once China’s largest listed solar company

圖1: 尚德電力破產,該公司曾經為中國最大的太陽能上市公司


The best way to mitigate this particular risk is through diversification. For each investment that is dependent on a certain outcome, such as a company remaining in business, you limit the capital invested to a manageable percentage of the portfolio. Care must be taken to ensure that several different investments in your portfolio are not dependent on the same outcome. A portfolio heavily invested in multiple heavily leveraged real estate companies would not protect you from a dramatic collapse in property prices.

要減少此類風險最佳的方法是利用多元化配置。對於每一個依賴於一定結果的投資項目,例如投資的公司維持營業, 你應將投資的資本限制在一個可管理的範圍內。而且投資者需注意你的投資組合中的不同投資不應取決於同一個事件的結果。一個投資於多家 高槓桿的房地產企業的投資組合,當房價全面下跌時,你將很難規避房價急劇下降所帶來的損失。

2) Path dependent return risk

Permanent loss of capital can even occur if the investment does not suffer permanent impairment itself. This is because investors are often forced to realize losses, whether through financial or psychological pressures. For example, the index of the global stock markets, the MSCI World Index, lost over 50% of its value between October 2007 and February 2009. Since then it has recovered and hit new highs. An investor who had the misfortune of investing in this reasonably diversified portfolio at the peak of the market in 2007 would still be showing a profit by the middle of 2013. However, an investor who had leveraged his portfolio through margin trading, would likely have been forced to realize a loss by his broker. Similarly, an investor who either could not take the pain of losing over 40%, or needed to liquidate his holdings to meet other financial needs would have lost his capital permanently. Even for investors who do not need to sell, having large unrealized losses can have adverse effects on his behavior in investing and in other areas of life, like emotional stress.

2) 路徑依賴的回報風險

Figure 2: MSCI World Index Total Return, 2003- 2014

Source: Bloomberg, MSCI


The way to avoid this kind of risk is to have an awareness of an investment’s or a portfolio’s potential movements before capital is committed, so that any unexpected paths that the price can take will not turn you into a forced seller. This awareness can be achieved through careful study of the price movement of the investment or similar types of investments throughout history. On top of that, some anticipatory thinking about potential impacts to a portfolio is necessary to avoid being taken off guard from movements that may not have happened in the past but could conceivably happen in the future.

規避此種損失的方法是要在投入資金前意識到該項投資或投資組合的潛在動向, 因此任何非預期的價格走向都不會使你被迫賣出股票。這種意識可以通過仔細研究該項投資或類似投資種類的所有歷史價格走向而獲得。最重要的是,對投資組合進行一些關於潛在影響的預期思考是必要的,以此可以使投資者在面對過去不曾發生過卻有可能在未來發生的狀況時不至於毫無防備。

3) Risk of not meeting your objectives

Even without suffering a severe capital loss, investors who make the wrong decisions are at risk of not meeting their personal or professional objectives for investments. This can be about reaching a certain level of returns in order to reach one’s financial or long term spending goals, or simply having one’s wealth outpace the rate of inflation. One could have either a mix of assets that is either too conservative in returns (such as having a too high an allocation in cash) or too risky for a particular time horizon. An example of the latter scenario would be needing a capital to meet a spending need within the next two years, like needing a minimum level of capital to buy a house or pay university tuition, but then putting it in a portfolio of stocks that could go up or down 20-50% in any given year.

3) 未達到投資者目標造成的風險


To mitigate this risk, would be again to research the potential path that your portfolio can take based on history or future scenarios before making the investment and then relating it to the both your time horizon and return objectives. One can be more aggressive with the capital needed to pay for an expense in 20 years rather than just two years.


A final point about risks in a portfolio and in personal wealth


Because of the personal nature of investment risks detailed above, counter-intuitively, taking lower risks can lead to stronger long term portfolio returns. A focus on achieving high short term returns without a consideration for the risks may leave one exposed to taking permanent losses or not meeting personal objectives.


Furthermore, a decent return on the entire portfolio beats an exceptional return on a fraction of the portfolio. Often, investors will split their returns into a large risk free portion and a small high risk high return portion in an attempt to gain adequate returns, while maintaining a level of safety. In an extreme example, gaining 50-100% on an risky investment (like a margined stock account) invested from 5% of the portfolio while neglecting the other 95% in cash, only results in a +2.5-5% on capital. While some investors may be tempted to enjoy the security of the 95% cash position while having the possibility of a high percentage return on the capital invested, it is also an easy path to taking a permanent loss of 5% if the risks of that investment is not anticipated. A better strategy would be to have a mix of investments where the risk can be better anticipated and controlled across the entirety of the portfolio. In this example, a strategy that achieves more certain 6-12% return across, say, 80% of the total capital can help the investor enjoy higher returns at lower level of personal investment risk.

此外,整個投資組合獲得一個良好的收益勝過小部分資產獲得的優異回報。投資者往往將回報分成兩部分:大的為無風險部分、留下一小部分為高風險回報,並想以此來取得足夠的回報值,同時保持一定水平的安全值。舉一個極端的例子,以投資組合5%的資產投資於高風險項目(如高槓桿 / 融資帳戶)並獲得50%-100%的回報,而剩下95%的資產以現金的方式持有並不投資,這樣的投資組合僅能提供2.5%-5%的回報。雖然一些投資者認為這樣的投資組合在取得高回報可能性的同時也能享受95%的資產為現金的安全感,但若這類投資的風險沒有被預期的話,那5%的高風險投資很可能成為永久虧損。一個較好的策略是配置風險較容易預期的投資項目並且能對整個投資組合進行控制。若80%的投資額能取得6-12%的回報,將幫助投資者在享受較高回報的同時承擔較低水平的個人投資風險。


Mr. Cheng is a managing partner at Clarity Investment Partners, a Hong Kong based independent private investment office that directly manages personal accounts for families and institutions.