Risk profiling is generally the first thing an investor goes through when building their portfolio. To most investors it is a one-time process. However, an investor’s risk appetite evolves through their investment journey due to their personal financial situation or household economics and therefore their risk profile also needs to be gauged progressively. We model risk on fairly granular level to allow better diversification of risk types.
At Berrywise, we model risk for:
- Market/macro factors
- Assets
- Investors
Market/macro factors: Markets are extremely dynamic, driven by traders, investors, geo-politics and world economics. To constantly monitor its ‘risk state’ is a monumental task. In order to tackle this we employ machine learning algorithms to monitor macro factors and asset classes and their changing dynamics to anticipate volatility and ensure that our investor’s mutual fund allocations are within their risk boundaries.
Assets: Assets like mutual funds, stocks, bonds and commodities trade in a dynamic market with each other, each having their own ‘risk-return’ profile. Every asset in a given asset class is monitored by our machine learning algorithms and are scored based on their long term return profile, volatility, their correlations with other assets and overall market landscape but also by fundamental factors such as their financial health, financial ratios, analysis ratings etc. From the thousands of assets, we shortlist a few that best represent a stable risk state.
Investors: Modelling an Investors risk is probably the hardest as people are generally subjective about their risk appetite, making quantifying it a challenge.
At Berrywise, we model an investor’s risk along two dimensions - loss tolerance and horizon risk.
a. Loss tolerance; People tend to underestimate their loss tolerance when they’re exposed to a return driven portfolio or asset choices. Quantifying it meaningfully to ensure we map right level of loss tolerance boundaries so we can shortlist right asset classes that respect such boundaries over long-term. We showcase the said analysis to our potential clients so they can make a more informed decision from risk perspective for their investment journey
b. Horizon risk; We cannot predict an investors future financial situation and how that might affect their risk appetite down the line. With traditional portfolio baskets, an investor is essentially locked into a fixed risk profile or strategy with their evolving risk profile having no bearing on their investments. At Berrywise, we allow investors to actively alter their risk state to accurately reflect their evolving outlook while also monitoring the market state and ensuring their portfolio remains within their allocated risk threshold.
By monitoring the three major aspects of risk drivers in a portfolio, we can recommend the right allocation and choices at the right time while also allowing a high degree of personalisation throughout an investor’s investment journey.
