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Measuring Your Portfolio's Volatility

Measuring Your Portfolio's Volatility

April 13, 2017

“The investor's chief problem - and even his worst enemy - is likely to be himself.”-- Benjamin Graham

Few investors know the true key to successful investing.

Here’s a pop quiz to see if you do:

You have $20,000 to invest across two different stocks at last Friday’s price.You buy $10,000 worth of a small Gold Mining Company -- a popular newsletter recommendation -- and you also buy $10,000 worth of an S&P big, super-safe, dividend paying stock.

Are you taking an equal amount of risk by putting an equal amount of your money in each position, yes or no?

The correct answer is: No.
To take equal risks in both stocks you would have to put $17,000 in the S&P big, super-safe, dividend paying stock and $3,000 into the small Gold Mining Company. 

The simplest way to measure risk is to look at volatility.

If I am expecting to get 15%, how likely is it that I get 30% or lose 15%?
That likely range of outcomes from a stock -- how much it will likely rise or fall over time -- is its volatility.  The wider range a stock will likely fluctuate between, the more volatile and risky it is.  The same applies to your overall portfolio. If you look at your entire portfolio, what is the range its value will likely fluctuate by? You want to optimize your portfolio so that you’re risking less to get the maximum return.

But how, exactly, do you measure volatility?


Think about your own investment portfolio for a moment. Maybe you used an asset allocation model when you began investing.  Maybe you even took asset allocation advice and have diversified into 10% gold, 30% cash, 20% real estate, 10% private equity, 15% bonds and 15% stocks. Within that 15% sleeve of stocks do you know what the relative risk is for each stock you own? 

I’m guessing for 99% of you reading this, the answer is no. That means you’re not getting the best return you can from all the stocks you own. You don’t have the proper information to decide how much money to put into each individual stock based on how risky they are.

If you happen to be like most people you plan on using a buy and hold strategy, then most likely abandon ship and sell when an individual stock starts to tank – especially if you haven’t equipped yourself to weather market volatility or developed a strategy to plan for it.  It’s not your fault.  Emotion drives even experienced investors to sell in moments of doubt and fear.  Even if you mentally train yourself to expect and withstand volatility, it’s not particularly easy to compare the volatility of two stocks on your own, let alone multiple stocks, and choose a position size for each.  Yet this is something professionals do to manage big money all the time. 

Your portfolio most likely needs a check-up.  We have systems to help analyze risk/return and help you maximize your returns based on your acceptable risk.

Our mission in the Wealth Management business is to provide you with the clarity, confidence, and commitment to help you achieve your financial goals, giving you a new-found understanding of how much is possible.  For a complimentary consultation send us an Email or view our appointment calendar to self-schedule an Account Review or an Initial Phone Consultation.