What is investment risk and how do we manage it?

Risk is often portrayed as something investors should avoid. In reality, risk is an essential component of long-term investing. Without taking some risk, there is little opportunity to generate the returns needed to preserve and grow wealth over the long term. The challenge is understanding which risks are worth taking and how portfolios should be structured to navigate an ever-changing investment landscape.

At Rothschild & Co Wealth Management, risk management is not merely a defensive exercise. It is a disciplined, ongoing process that underpins every investment decision we make. From portfolio construction to rigorous equity research and intelligent diversification, our focus is on building resilient portfolios that can support clients through a wide range of market environments.

Understanding risk beyond market movements

Many investors associate risk with volatility or short-term market declines. While these are important considerations, they represent only part of the picture.

Investment risk can take many forms. It may stem from excessive concentration in a particular asset, sector or investment theme. It can also arise from insufficient liquidity, making it difficult to access capital when it is needed.

For long-term investors, the most significant risk is often not ‘shallow risk’, such as temporary fluctuations in portfolio values, but ‘deep risk’, where a material market drawdown could compromise the ability to achieve long-term objectives.

A structured approach to risk management

Risk management is embedded throughout our investment process.

Central to this are our Portfolio Managers and our Investment Oversight Committee, who continuously review market developments, portfolio positioning and the changing risk environment. Rather than reacting to short-term headlines, we focus on understanding how risks evolve and whether portfolios remain appropriately positioned.

Through a structured framework of portfolio exposure limits and appropriate liquidity thresholds, we seek to ensure that a suitable balance and spread of investments is maintained within client portfolios at all times. This also helps provide clients with access to capital if and when they require it, rather than being dependent on market conditions.

Building resilient portfolios

Our portfolios are actively managed on a discretionary basis, drawing on our investment team's in-depth research and analysis, and investing on a bottom-up basis, with conviction and a long term time horizon. Our portfolios include a blend of Return and Diversifying Assets.

Return Assets are expected to drive growth over time and are typically comprised of equities and some specialist third-party funds. Our Diversifying Assets aim to provide protection in challenging equity markets, as well as an alternative source of returns, and liquidity during market downturns. They include assets and funds that tend to have low correlation to stock markets and typically include Alternative investment strategies, portfolio protection, bonds and cash.

Diversification remains a fundamental component of risk management. By combining different asset classes, investment styles and return drivers, portfolios can become less reliant on any single source of performance.

We also offer Exbury, our sustainable investment portfolio strategy, which seeks to achieve returns of 3% above inflation while incorporating environmental, social and governance considerations into the investment process. The strategy has an additional focus on ‘enablers’, investments that our research shows are helping to enable the goals of the Paris Agreement and the transition to lower-carbon economies, thereby offering clients the ability to reflect their sustainability preferences within the same disciplined investment framework that underpins our broader approach.

A long-term perspective

Periods of market uncertainty are inevitable. Geopolitical developments, interest rate changes, economic and business cycles, and shifts in investor sentiment will continue to create volatility.

Our role is not to predict every market movement, but to ensure portfolios are positioned to navigate a broad range of potential outcomes. Through a robust framework, disciplined portfolio construction and continuous monitoring, we seek to manage risk in a way that supports long-term wealth preservation.

For clients and their advisers, this provides confidence that investment decisions are being guided by a repeatable and carefully governed process. Risk will always be part of investing, but when it is understood, and managed effectively, it becomes a tool that can help clients achieve their long-term objectives rather than be a threat to them.

Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.