The market volatility during 2018 has caused many investors to re-examine their exit strategies and how they can pull risk off the table in case this downturn turns into a full-fledged bear market.

We have given you articles that help you find the right exit strategy, manage stocks in the SSI Red Zone, and create a trailing stop for your entire portfolio.

Today we’re going to show you how one of the TradeStops tools can potentially help you reduce your overall portfolio risk and exposure to the current market volatility.

Here is the sample portfolio that we’ve been using in many of our training articles for the past couple of years.

sample training portfolio
The portfolio, which we’ve held since late 2015, is currently showing a long-term gain of almost $41,000. All of the positions are currently profitable since the time we started tracking.

long term gain in sample portfolio
Those looking to use the normal volatility of the portfolio as their exit strategy would focus on the Portfolio Volatility Quotient (PVQ). For this portfolio, the PVQ is currently at 14.58%.

14.58% portfolio volaility quotient
In addition to showing you your overall risk, TradeStops also has a way to potentially reduce that PVQ number so that you are taking even less overall risk.

It’s called the Risk Rebalancer. Just to remind you, the Risk Rebalancer takes the stocks in your current portfolio and rebalances the portfolio so that the risk you’re taking is the same in each position. That means you’ll be investing more money in the stocks that are less risky and less money in the stocks that are riskier.

Using the Risk Rebalancer, we can reduce the PVQ of this portfolio to only 11.0%. That’s an improvement of almost 25% over the previous PVQ.

reduced PVQ of the sample portfolio
We ran this portfolio through the Risk Rebalancer on Oct. 31. Here is the breakdown of the stocks and number of shares.

rebalanced portfolio with position sizes
You can see that there are more shares in the portfolio of the lower-risk stocks like KO and PFE and less shares of the riskier stocks like TEVA and NFLX.
Let’s compare how the two portfolios have performed since using the Risk Rebalancer on 10/31.

The original portfolio is down 4.28%.

original portfolio down 4.28% since 10/31
The Risk Rebalanced portfolio is down as well, but only by 1.27%.

rebalanced portfolio down 1.27% since 10/31
The rebalanced portfolio is taking less risk than the original portfolio, and it has performed better during this down market than the original portfolio.

When the markets are moving higher, it’s easy to let your big winners run and become an oversized position in your portfolio. But when the markets are moving lower, equalizing the risk in each position is a way to potentially pull some risk off the table.

During last week’s webinar, one of our listeners, Kevin, asked us a question about what the loss in our sample portfolio would have been if we used a start date of Oct. 3, which was at or close to the market top. We didn’t have the time to answer that during the webinar itself, but we promised that we’d present those results in this article.

Had we been using the portfolio trailing stop from that date, we would have stopped out after Friday’s strong move to the downside.

sample portfolio down 14.62% with a start date of 10/3
By the way, that same portfolio, but with the Risk Rebalanced shares, is down only 10.11% and hasn’t hit its stop yet.

sample risk rebalanced portfolio down 10.11% with a start date of 10/3
It’s easy to focus on returns rather than risk when the markets are moving higher. But now’s the time to focus on risk and minimize potential losses (and book more realized profits if you do sell). The Risk Rebalancer is a smart tool that can help you achieve the goal of taking less risk in difficult market conditions.


Tom Meyer
Research and Education Specialist