Risks
Any investment involves an element of risk. By adopting a disciplined, long term value investing methodology, combined with the application of risk minimising derivative trading strategies, we seek to reduce risk wherever possible. Indeed, academic studies have shown that application of the strategy employed in the Bellmont Buy-Write Portfolio serves to significantly reduce the risk of holdings, when compared with a standard equity portfolio. (Full details may be found, under ‘Resources’.)
Risks that you should be aware of when considering an investment in the Bellmont Buy-Write Portfolio include:
Systemic Risk
The share market is inherently volatile, and share prices may be subject to substantial and at times prolonged declines. Whilst the strategy that we employ seeks to minimise risks through derivative trading and a long term, patient and disciplined investment methodology, substantial risks relating to volatility of the share market remain.
Stock Specific Risk
We seek to invest in a limited number of companies (approximately 15) that roughly represent the sector composition of the underlying index. Given the focused nature of the holdings, your portfolio will be more susceptible to losses arising from the under performance of any particular share relative to its sector average. However, it is also this de-coupling from the index and sector average returns that allows us the potential to outperform over the long term, by focusing our investments in those businesses that we believe exhibit greater than average potential, and are available at a discount to our estimate of their intrinsic value.
Strategy Risk
The derivative trading strategy that will be employed on your Bellmont Buy-Write Portfolio serves to decrease overall risk, as measured by portfolio volatility. Although history suggests that over the long term it leads to higher average returns than a naked portfolio, in any particular period there is the potential for the strategy to lead to under-performance. In general, the strategy will tend to out perform the broader index in sideways, down-trending and slowly rising markets, while potentially underperforming in strongly rising markets.