Understanding Risk

Risk is a critical concept in asset allocation.  The goal of every investor--individual or institution--should be to base their strategy on future risks.  Not only is allocating by risk a difficult task, risk is often misunderstood.

Risk resides in a portfolio at all three levels:  the security level, the asset class level, and the management level.  The theme around mitigating risk is often about diversification; however, diversification often excludes the largest risk to any portfolio--behavioral risk.

Behavioral risk also appears to be the least understood of the three. Difficult, if not impossible to quantify, behavioral risk is inherent in every investment decision. Only through a careful process that actively seeks to mitigate this threat can a portfolio be adequately protected.

Castle has implemented a process to identify behavioral risk inflection points throughout our investment decision making. This process has helped us to avoid some of the pitfalls investors have faced over the last several years and we look forward to continuing to focus on this oft-neglected realm of risk management.