Risk management is one of those investment disciplines that reveals its true importance only when something goes wrong — and Toby Watson’s career offers a grounded set of principles for getting it right before that happens.
Risk management is widely acknowledged as central to sound investing, yet it is frequently misunderstood, poorly applied, or reduced to a set of compliance metrics that bear little resemblance to the real challenges investors face. The gap between risk management as it appears in frameworks and as it functions in practice can be significant — and costly. Toby Watson, whose career placed him at the centre of some of the most complex risk environments in modern finance, brings a practical and experience-based perspective to what sound risk management actually requires.
Toby Watson is a Partner at Rampart Capital, an independent London-based investment office providing bespoke investment management and advisory services to wealthy individuals and families. Before joining Rampart Capital in 2020, Toby Watson spent nearly 17 years at Goldman Sachs, working across structured credit trading, principal funding, and global infrastructure financing — experience that placed him directly in some of the most demanding risk environments of recent decades. That background informs an approach to investment management that treats risk as a first-order consideration rather than an afterthought. Toby Watson also served as Chairman of Excalibur Academies Trust from 2018 until early 2026.
Sound Risk Management in Modern Investment Portfolios — Drawn From Toby Watson’s Experience in Global Finance
Risk management in investment portfolios is not a single activity — it is a collection of disciplines that need to work together. The following eight principles draw on the experience Toby Watson developed across a long career in structured finance and investment management, and reflect an approach that treats risk seriously as a matter of practice rather than policy.
Why do so many investors manage risk poorly despite knowing its importance?
The gap between acknowledging risk and managing it well tends to come down to incentives and habits. In benign market conditions, risk management can feel like an unnecessary drag on returns. Toby Watson’s view, shaped by working through multiple market cycles at Goldman Sachs, is that the principles of sound risk management need to be embedded in the investment process itself rather than applied as an external check — precisely because they are most likely to be abandoned when they are most needed.
1. Treat Liquidity as a First-Order Consideration
Liquidity — the ability to access capital, exit positions, and act when opportunities arise — is one of the most important and most underweighted dimensions of portfolio risk. Portfolios that sacrifice liquidity in pursuit of higher returns may look attractive in normal conditions and become deeply problematic when conditions change. Toby Watson considers liquidity planning a foundation of sound portfolio construction, one that needs to be assessed explicitly rather than assumed.
2. Distinguish Between Risk Taken and Risk Embedded
Not all portfolio risk is deliberate. Some of the most significant risks accumulate through allocation decisions, instrument selection, or structural features that were not fully analysed. The discipline of identifying embedded risk — understanding what the portfolio actually contains, not just what it was designed to contain — is one that Toby Watson developed working through complex structured instruments and considers essential to genuine risk management.
3. Stress-Test Assumptions Rather Than Validate Them
Models are built on assumptions that tend to be tested most severely when the stakes are highest. The appropriate use of risk models is not to confirm that a portfolio is safe, but to identify the conditions under which it might not be. Stress-testing should be genuinely adversarial — exploring scenarios that challenge the portfolio’s design, not just scenarios that fall within historical norms.
Building Genuine Resilience Through Adversarial Testing
The difference between portfolios that hold together under stress and those that do not often come down to whether stress-testing was taken seriously during construction. The experience Toby Watson gained at Goldman Sachs — working through the 2008 financial crisis directly — reinforced the importance of testing assumptions with genuine rigour rather than relying on optimistic scenarios that miss precisely the conditions that matter most.
4. Understand Correlation Risk
Diversification is only as effective as the independence of the assets involved. When market conditions deteriorate, correlations tend to rise — often eliminating the diversification benefit at precisely the moment when it is most needed. Managing correlation risk requires thinking in terms of underlying risk factors rather than asset class labels, and building portfolios that are genuinely diversified rather than superficially so. Toby Watson considers this one of the most persistently underestimated dimensions of portfolio risk.
5. Manage Concentration Actively
Concentration risk tends to accumulate gradually — through successful investments that grow and through the slow erosion of discipline around position sizing. Active management of concentration requires regular review and the willingness to reduce positions that have grown beyond their appropriate weight, even when doing so feels counterintuitive. It is one of those risk management disciplines that is easiest to neglect in strong markets and most consequential when markets turn.
6. Separate Risk Capacity From Risk Tolerance
Risk capacity — the objective financial ability to absorb losses — and risk tolerance — the subjective willingness to do so — are different things, and conflating them is a common source of poor investment decisions. The practical implications of this distinction include:
- Assessing the investor’s realistic liquidity needs before determining appropriate risk levels
- Stress-testing the portfolio against scenarios that would test both capacity and tolerance simultaneously
- Building in buffers that account for the gap between how investors expect to feel during drawdowns and how they actually feel
- Revisiting risk parameters regularly as circumstances change rather than treating initial assessments as permanent
7. Embed Risk Management in the Investment Process
Risk management that operates as a separate function — applied after investment decisions have been made — tends to be less effective than risk management embedded in the process from the start. Toby Watson’s approach at Rampart Capital reflects this principle: risk considerations are part of portfolio construction, not a check applied afterwards. That integration means risk is assessed at the point where it can actually be influenced.
8. Maintain Discipline When It Is Least Comfortable
The most important risk management decisions tend to be the most uncomfortable — reducing exposure when markets are strong, maintaining liquidity when illiquid assets look attractive, holding to process when recent performance makes deviation tempting. The discipline of maintaining risk management principles consistently, rather than applying them selectively when conditions make it easy, is what separates sound long-term practice from its less effective alternatives. For Toby Watson, that discipline was built over decades of working in environments where the consequences of abandoning it were real.
