Pennsylvania Trust

Managing Risk in Today’s Financial Environment

Photo of Jon Heckscher

Investment risk takes various forms and comes from many sources. From volatility of returns, to the potential for permanent loss of capital, and ulti­mately to the failure to achieve a client’s goals — the transforming landscape of investments places a premium on an advisor’s ability to evolve and manage risk. As trusted stewards of our clients’ wealth, we are well aware that we live in a world of increased market risk — one that is shifting from that of high return and low risk to just the opposite — higher risk and lower return.

The past decade of extraordinarily low interest rates and below-trend eco­nomic growth, combined with full equity valuations, has investors challenged to meet their investment objectives without taking on undue risk.

As the investment landscape chang­es, we realize that clients have more choices. From the variety of investment products and cost structures to new technologies and regulation, the value proposition is more important than ever before. At Pennsylvania Trust, we believe a thoughtful asset allocation process and disciplined portfolio construction are the keys to maximizing the likelihood of suc­cess and ultimately bringing our clients closer to achieving their goals.

A thoughtful allocation process and disciplined portfolio construction are the keys to maximizing the likelihood of success.

Asset allocation refers to the distri­bution of assets among various asset classes based on a client’s time horizon, risk tolerance, investment goals, and in­dividual preferences. Asset allocation, while being a main driver of total returns, also helps to limit risk and reduce the portfolio’s volatility. While there is no uniform solution to asset allocation, it is imperative that customized de­cisions about optimum as­set allocation are made to help clients achieve their financial goals. They must be periodically re­viewed as well.

 

At Pennsylvania Trust, our process begins by focusing on three main concepts: setting investment objectives, understanding investment risks and min­imizing investment drag.

  1. Setting investment objectives requires a thorough understanding of a client’s needs and goals.
  2. Understanding investment risks requires a thorough understanding of the different forms risk can take and how to manage risk with asset allocation and portfolio construc­tion.
  3. Minimizing investment drag re­quires a thorough understanding of how both fees and taxes can be budgeted efficiently to meet client goals and expectations.

Regardless of whether the invest­ments are in individual stocks, bonds, ETFs, and/or funds, our portfolio con­struction relies on an unbiased process for analyzing the available options. Once an asset allocation strategy has been se­lected to meet risk and liquidity param­eters, the portfolio construction process looks at individual client personal goals and restrictions. During this process we may occasionally utilize certain invest­ments to meet ESG (Environment, So­cial, or Governance) and SRI (Sustainable and Responsible Investments) objectives or to address client-specific restric­tions.

Achieving an ideal asset allocation is an ongoing process. Cli­ent circum­stances may change which can alter the portfolio’s goals. It is im­portant that you and your Pennsylva­nia Trust advisor maintain an open channel of communi­cation to convey these changes and sub­sequently re-examine the allocation. Our asset allocation approach seeks an ap­propriately diversified asset mix to help smooth out the ups and downs of the market so that portfolios can enjoy the positive compounding of returns over time. In the end, this smoother path will be calmer on the nerves and ultimately help investors remain on course when turbulence strikes.

Jon is Senior Vice President, Director of Fixed Income and Investment Strategy at Pennsylvania Trust.


Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome – including performance – is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.