This is a brief primer on Systematic Resilience, our processes and diagnostics for quantifying and assessing investment risks. This post will be updated over time as our process evolves.
We rigorously evaluate the potential risks of investments we incorporate into portfolios, not just the expected medium to long-term returns they may generate. We believe it is impossible to consistently make short term predictions about what the markets will do. But we should at least be well-informed about the risks we are taking with the assets we incorporate into our portfolios.
We have a series of these risk metrics we look at for investments which include:
- Valuation: Analyzing the current price of an investment relative to its underlying cashflows (in the case of stocks and bonds) or historical price levels (in the case of commodities or other assets with no cashflows).
- Risk-Adjusted Returns: Understanding the amount of return we are getting for every corresponding point of risk we are taking. The higher this number the better. The calculation is simply the Return / Standard Deviation. We look across multiple time periods when evaluating this number.
- Asset Correlations: Assessing how the investment relates to other assets in the portfolio as well as the portfolio overall. The ideal is to find an asset with very low correlation to the rest of the portfolio that provides a strong, Risk-Adjusted Return.
- Stress Period Performance: Examining how the asset has performed under various adverse market or economic conditions such as the 2022 US Stock and Bond drawdown, 2008 Financial Crisis, etc.
- Max Drawdowns: Cataloging the largest observed losses over the life of the asset and / or asset class.
Optimizing the combination of these factors when selecting investments for each client’s needs and risk tolerances is what we call Systematic Resilience.
We share these metrics openly with our clients and selectively in our ongoing, publicly-facing research. We will be refining and codifying these and other diagnostics into more structured Playbooks as we continue to build our Investment Management practice.
To learn more about our process or to speak with an advisor, reach out to us at:
email: [email protected]
Disclosures:
This content is for educational purposes only and is not an investment recommendation. Employees and clients of Kangpan & Co. may hold positions in securities discussed in this post. Speak with a licensed financial advisor before making any changes to your investments. Past performance is no guarantee of future returns. Investing involves risk including the loss of capital.
Kangpan & Co. 