Exo Investing Blog

Why individualised risk management is so important

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As machine learning algorithms become more intelligent and efficient, a bespoke service should become a prerequisite for any investor parting with their hard-earned cash.

If you have been researching investment portfolios, the following scenario may sound familiar: you fill out a questionnaire, are given a certain risk profile and slotted into one of a limited range of portfolios. The managers sell in and out of their holdings a maximum of four times a year, no matter how the markets change and the impact on your bottom line. You pay an annual fee, and wrack up trading fees, for the privilege. The icing on the cake is that your portfolio looks the exact same as hundreds, if not thousands, of other investors.

At Exo, this couldn’t be more different. Our unique proposition means that our investors enjoy a personalised service — so that no one’s portfolio is the exact same — as well as access to portfolio technology “behind some of the biggest names in investment available to ordinary investors” (The Times, AI lets you trade like a banker) that was once only available to big institutions and private banks.

Investment choices are inherently personal to you. They are tied to your career and life goals, as well as your attitude about how much risk you are willing to take. What countries, sectors and themes are you interested in? Do you prefer sustainable investment, for example, or are you more excited by technology stocks? Are you saving money for something specific? What do you need to live on after retirement?

The answers to these questions will be different for every investor and need to be considered to achieve the maximised return on their investments. Even your point of entry to the market and how much you invest can also make a big difference to your returns.

Once we have the information we need, Exo can set to work to create the best portfolio for each investor and, since our algorithms have been honed over 30 years now thanks to our partnership with ETS, Exo is rather ahead of the game. We have access to a universe of over 500 exchange traded funds (ETFs) — low cost, transparent funds which track a given market — to choose from. Exo constantly scours the ETFs listed on the London Stock Exchange to select the best ones to populate the portfolios, based on quantitative and qualitative factors, and the funds are re-analysed every day.

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A systematic approach is important because while there are plenty of commentators who stake their careers on what the future holds, we don’t claim to have a crystal ball. Instead, we use machine learning algorithms to look at recent market activity as well as historic and future market scenarios. By doing so we can identify the optimum portfolio positioning for the present on an ongoing basis.

This means investors are able to participate in market highs without being over exposed to a significant loss. At Exo we realise an investor’s capacity for loss differs greatly, depending on when they enter the market, even with a similar risk profile. We believe in the power of daily portfolio management, which gives Exo the all important data to drive the decisions behind its portfolio distribution.

In this way, Exo aims to strike the perfect balance between individualised service and effective execution. Sometimes people forget that humans are behind capital markets, and we can fall prey to herd-like mentality, rushing in and out of the same stocks, as well as make decisions based on our emotions. Take a look at our recent infographic explaining just some of the investing biases humans can demonstrate. But algorithms don’t act that way. They are not irrational. Instead, they compare a wide range of scenarios and come up with the best middle ground. So, while the market conditions can quickly change from a long-term rally to a panic-fuelled sell-off, we ensure that your portfolio remains within your risk parameters.

And we don’t just look at the short term, either. We consider the best strategic positioning so that investors have the opportunity to benefit from uptrends in the market, but also sail a relatively smooth path for as long as they want to continue investing.

This approach to “smoothing” the investment journey is key given that the market doesn’t care when you retire. By focussing on controlling the drawdown of each individual investor, we can give our customers a greater level of freedom when it comes to their investments.

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The ‘robo advice’ trend has done wonders for empowering individuals to try their hand at investing, but we want to go beyond ‘robo’ with no set rules for how often we turn over your portfolio. Daily calibration means we are flexible, and we can move investors out of riskier markets and into safer havens whenever it is needed, and for no extra cost.

Transparency is also key, as it gives investors much needed control. You can also log on to view your portfolio 24/7, via the website or the app, to see what is in your portfolio and how much the underlying securities have returned. Our customer service team is always there and ready to answer your questions. At some point, your life trajectory and goals may change, and therefore so must your portfolio. We are ready to change with you.

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To put it simply: whether you buy a car, a house or a financial product, each customer has different needs and expectations. In investment, this shouldn’t be any different. And in a world of quick market movements and an uncertain global economy, individualised risk management has never been more important.

As machine learning algorithms become more intelligent and efficient, a bespoke service should become a prerequisite for any investor parting with their hard-earned cash.

When investing, capital is at risk.