Your Risk Score - McElhenny Sheffield Capital Management

Understanding Your Risk Score

Understanding your investment risk tolerance and risk capacity is an important part of making good investment decisions to achieve your goals. Every investor must take investment risks in order to generate returns. We have a long history of investing client assets in a disciplined manner with a strong focus on risk management, which has allowed our clients to achieve strong returns while generally taking lower levels of risk. We believe this is the only path to successfully investing for the long term.

Begin Your Personal Risk Assessment

We utilize StratiFi’s PRISM™ risk scoring technology to assist our advisors and clients in understanding which sources of risk drive performance to both the upside and downside. Risk is inherent in any investment portfolio exposed to the randomness of financial markets, and this risk must be monitored and managed to increase the chances of having successful investment outcomes.

Every MSCM client gets a PRISM™ rating that can be used to compare their risk profile to the risk of their portfolio. A simple client profiling questionnaire is used to evaluate both risk tolerance and financial capacity to help you identify a suitable portfolio to meet your goals. This enables our advisors to seek to deliver a much better client investment experience that is in line with the client’s risk profile. After answering a series of questions about goals, personality, and personal situation, clients get awarded a target risk rating from 1 to 10; 1 signifying the lowest possible risk and 10 being the highest. The client’s target rating is used as an anchor score to compare it to the portfolio PRISM rating. This target rating is a critical insight that assists in revealing if clients are taking too much, or too little, risk.

StratiFi’s PRISM™ Rating uses a factors-based approach to quantify different risks within a portfolio into the same 1 to 10 scale. The PRISM software also creates an overall rating for a portfolio that blends the different factors. StratiFi’s PRISM technology makes managing risk more relatable and usable by distilling it into a set of defined risks and associated numbers. These numbers can be easily calculated for each investment portfolio.

Investing Is About Human Behavior

4 Easy Steps to Assess Investment Risk

Step
1

Determine your personal risk score

Step
2

Have MSCM determine your portfolio risk score

Step
3

Discuss and understand the
differences

Step
4

Work with MSCM to align your

portfolio to your risk score

Begin Your Risk Assessment

Many people make terrible, emotional decisions in response to market movements, and they act like bad short-term traders, even though they think they are long-term investors. This disconnect is a great curiosity that reflects the psychological difficulties of investing. Most people work hard, save money through sacrifice and habit, and they try to amass a significant amount of money for their retirement. Understandably, when their hard-earned portfolios are tossed around in the stock market like little boats in rough seas, strange decisions often follow. People sell when they should buy just as surely as they buy when they should sell.

By discussing investment risks, just like investment goals, advisors can educate clients about the realities of financial markets. Those discussions, and associated investment strategies, help advisors evolve their relationships with their clients. Many successful investors approach the market in different ways, but they have this in common: they tend to not lose a lot of money. That simple fact is not part of the narrative that surrounds markets and investing.

Individual investors primarily focus only on the return potential of investing and usually ignore downside risks. They tend to see the financial markets as a field of dreams where investments age gracefully and double in value every seven to 10 years. So many of these investors are so focused on making money and making a lot of it, that they often have unrealistic expectations. These unrealistic expectations blind them to the risks that they must take to achieve any return. It is a curious phenomenon, and one of the reasons why so many people are so ill-prepared for retirement.

Why Understanding Risk Is Important

Most people understand that risk is what drives return, but the concept of understanding risk before chasing return barely exists outside of the rarified world of institutional money management. Due to the asymmetry between gains and losses, failure to understand portfolio risk before chasing return may lead to large losses, that would require even larger gains to achieve the desired outcome. This has the potential to significantly diminish the probability of success for investors.

PRISM™ analyzes portfolios for exposures to four key dimensions that are widely acknowledged as leading indicators of risk, and thus reward: volatility, diversification, concentrated-stock risk, and tail risk. These factors are designed to identify exposures that may permanently take a client off-plan.

At MSCM, we believe the problem plaguing most advisors and their investors is that they underestimate the frequency and magnitude of capital destruction that can accompany tail events. For clients seeking to protect principal, it’s not the probability of the event but rather the severity of the event that matters. Further, their first line of defense against tail events continues to be traditional multi-asset class diversification (i.e., blending stocks with bonds), but we have seen numerous times that many assets in a seemingly diversified portfolio fall in unison during major market events – truly limiting the benefit achieved by asset class diversification.

How MSCM Tactical Strategies Help Manage Risk

Our Tactical strategies take a different approach than traditional asset allocation portfolios and attempt to provide true diversification when it matters – during major corrections and bear markets. During these market events, our strategies are designed to deliver positive returns, seeking to reduce the impact of losses on client portfolios and allowing them to potentially have a more comfortable path to retirement.

The traditional 60/40 portfolio with a 60% allocation to stocks and a 40% allocation to bonds has a
PRISM™ Risk Score of 6.4.

The MSCM 50% Trend Plus and 50% Sector Rotation strategy (TPSR) has a risk score of only 4.3, illustrating how it is designed to be less risky than the traditional buy & hold 60/40 portfolio, based on historical data.

The TPSR strategy scores even better than a portfolio consisting of 50% stocks and 50% bonds,
which has a score of 5.3.

While past performance is not necessarily indicative of future results, the MSCM approach to investing, which focuses on risk management and avoiding material losses, has been designed to seek strong returns while taking lower levels of risk than many traditional investment options.

At a time when the 60/40 portfolio seems to carry far more risk than normal – with the current high equity market valuations leading to lower expected returns for stocks, and the low interest rates leading to bonds suffering losses as interest rates rise – we think tactical investing that focuses on risk management will support investors in achieving their investment goals.¹

¹Past performance may not be indicative of future results. Risk scores are at a specific point in time and could change over time.

Begin Your Personal Risk Assessment

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Phone: (214) 922-9200

© 2024 McElhenny Sheffield Capital Management (MSCM). All Rights Reserved. The content of this website is for general, informational purposes. Nothing contained on this website should be construed as an offer to sell or the solicitation of any offer to buy any security or other financial instrument or product offered or managed by MSCM or any other issuer or company. The provision of this information does not constitute the rendering of investment, consulting, legal, accounting, tax, or other advice or services. Information on this website should not be the basis of or be relied upon for making business, investment or other decisions or used as a substitute for consultation with professional advisors, nor should it be construed as advice, endorsement or recommendation. Special Notice to Non-U.S. Investors: Each of the investment products and services referred to on this website is intended to be made available to U.S. residents. This website shall not be considered a solicitation or offering for any investment product or service to any person in any jurisdiction where such solicitation or offer would be unlawful.

Investing involves risk. Principal loss is possible.

There can be no assurance that an investment mix will lead to the expected results shown or perform in any predictable manner. It should not be assumed that investors will experience returns in the future, if any, comparable to those shown, or that any or all of MSCM’s clients experienced such returns. No representation is being made that any account will or is likely to achieve results similar to those shown. Individual client results could significantly differ from the performance results being presented. Differences in account size, risk tolerance, timing of transactions and market conditions prevailing at the time of investment could lead to different results, and clients could potentially lose money.

If an indicator or stop levels fail to detect significant downturns in the market, the strategies will continue to be exposed to underlying positions that could potentially lose value during such downward periods. Similarly, if the indicators fail to timely identify a reversal of a downward trending market, the strategies will continue to be exposed to defensive ETFs at a time when there is significant appreciation in the equity markets. Either scenario could result in a strategy underperforming other investments that do not employ these strategies. There can be no guarantee our strategies will correctly or timely identify the industries, sectors, or asset classes that will outperform during a given quarter or that the strategies will correctly or timely identify market trends.

The strategies invest in other ETFs which will result in higher and duplicative expenses. If the strategy invests in U.S. Dollar ETFs, changes in currency exchange rates and relative value of non-U.S. currencies will affect the value of the investment. Investments in fixed income securities typically decrease in value when interest rates rise. If interest rates fall, certain obligations could be paid off more quickly and the proceeds invested in securities with lower yields. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness could also affect the value of an investment in an issuer.

Investing in ETFs are subject to risks that the market price of the shares could trade at a discount to its net asset value (“NAV”), an active secondary trading market could potentially not develop or be maintained, or trading could be halted by the exchange in which they trade, which could impact our ability to sell shares of an ETF.

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