At TradeStops, we want you to become successful investors. Everything we do is to position you to reach and exceed your investment goals.

We developed the Volatility Quotient (VQ) and Stock State Indicators (SSI) to help you make intelligent, mathematically-based decisions about your stocks. And every TradeStops member can benefit from understanding their stocks better than they did without TradeStops.

But those who don’t have access to our portfolio-level tools are missing out on another level of understanding – The Big Picture.

The Big Picture tells you how diversified your portfolio is. It tells you what the overall volatility of your portfolio is. And it can take your portfolio and position it for greater long-term gains. Let’s take a look at The Big Picture.

The first portfolio-level tool in TradeStops is the Asset Allocation tool. This allows you to look at the diversification in your portfolio both by sector and by industry. Very simply, the more colors displayed, the better your diversification is.

Here’s a portfolio of 10 well-known stocks. It includes stocks with low, medium, and high volatility. In this example, we’ve sorted the stocks by their VQ%. Coca Cola (KO) has the lowest VQ, and Goldcorp (GG) has the highest VQ.

Sample portfolio of 10 well-known stocks

This portfolio is well-diversified. Using the Asset Allocation tool, you can see that the 10 stocks represent 8 different sectors.

Example of Sample Portfolio's diversification with TradeStops' Asset Allocation tool

It’s probably a little overweighted in the Consumer Discretionary sector. Let’s look at the diversification by industry.

Diversification by industry sector displayed in Asset Allocation

We have 10 stocks invested in 9 industries. We probably have too much invested in the Internet and Catalog Retail industry. Let’s look at the stocks that make up that industry. We just have to click on the blue section of the pie chart to see.

Asset Allocation allows you to view the stocks that make up an industry sector in your portfolio

Netflix (NFLX) and Amazon (AMZN) are the two stocks that are part of that industry.

Now let’s look at the volatility of this entire portfolio.

The Portfolio Volatility Quotient (PVQ) is the term we use that measures the risk of the overall portfolio. Again, this is The Big Picture view. The PVQ looks at the correlation between the stocks to make this determination. What is this correlation?

Stocks don’t move up and down at the same time. A large pharmaceutical stock like Pfizer (PFE) is not normally going to move in the same direction and by the same amount as an online retailer like Amazon (AMZN). We measure this correlation going back 3 years.

By looking at the different correlations, we can determine what the normal portfolio volatility should be. In the case of the above portfolio, the PVQ is only 16.75%.

Portfolio Volatility Quotient (PVQ) measures overall volatility/risk of portfolio

Of the 10 stocks in this portfolio, 5 of them have a VQ greater than the PVQ of the portfolio itself. This shows the power of having a well-diversified portfolio.

The last of the Big Picture portfolio tools is the most powerful of all. This is the Risk Rebalancer. Very simply, the Risk Rebalancer equalizes the risk among all the positions in your portfolio. In just one click, you can reallocate your investments so that you’re investing less money in your riskier stocks and more money in your less risky stocks.

By applying these changes, the overall PVQ can be lowered in many cases. In this example, we’ve lowered the PVQ from 16.75% down to 13.77%. That’s a big change. We’ve lowered the PVQ by almost 20%. And we know that we have about $1700 of risk in each of our 10 positions.

Risk Rebalancer helps equalize risk among all positions in your portfolio

And here are the changes that would be made for the portfolio to be in risk-parity. Notice that we would be increasing the number of shares of GG which is the most volatile stock, yet we would still be dramatically decreasing the overall risk in the portfolio.

Risk Rebalancer includes the steps to take to decrease overall risk

The Risk Rebalancer is a powerful tool, but you don’t want to use it too often. If you rebalance your stocks too often, you run the risk of missing out on some dramatic gains. Take a look at NFLX above. The original investment of $10,000 into NFLX has grown to over $33,000. You don’t want to cut short the growth of these types of stocks in your portfolio.

We’re going to have a special educational webinar on March 21st at 1:00 PM EDT that discusses the Big Picture concepts in greater detail. Click here to register for this presentation. Even if this time is not good for you, register for the webinar so we can send you the link to the recording once it has been completed and you’ll be able to watch it at your convenience.

Looking forward to your investment success,

Tom Meyer
Education Specialist, TradeStops