If you’re the kind of person who pays attention to taglines, you may have noticed we recently changed ours to “Make More. Risk Less.” (To check if you’re the kind of person who pays attention to taglines, just ask yourself what our old tagline was.)
Everyone has a pretty good idea of what it means to “Make More.” But what does it mean to “Risk Less”?
After all, we can always risk less, right? We can pass up a promising investment, we can turn down a challenging new job offer. Heck, we can just stay in bed all day.
But that’s not us. We recognize any growth, whether personal or financial, requires risk.
In the TradeStops vocabulary, “risk less” has a very specific meaning.
The takeaway is that different investments carry different risk levels. (and here we’re talking about stocks you plan to hold for several months or years)
Risk is the amount of capital you are willing to lose in light of the potential gain you stand to make.
Now that doesn’t mean the total amount you’ll invest in a position, but rather the amount you will potentially lose if the position hits its stop price.
Dr. Smith has written several articles about this but it bears repeating:
The single biggest risk to the portfolios of individual investors is when you have a very large position in a very volatile stock.
Here are Dr. Smith’s thoughts:
The Risk Rebalancer, which is available to TradeStops Premium and Lifetime members, ensures that volatility is accounted for whenever you take a position.
This is a complete game-changer for investors.
Let’s look at one of Dr. Smith’s recent examples.
Here’s a list of volatility levels (VQ%) on popular stocks.
(Note: we update our VQ percentages weekly and this is not the most recent list.)
The main thing to keep in mind is different stocks have different levels of risk. That is, some stocks are more volatile than others. Now, that may seem to be common sense, but it has huge consequences.
These volatility levels serve as the basis of TradeStops’ SSI Stop signals as well as for volatility-based position sizing.
Taken a step further, we now see how we can use this information to create a risk-balanced portfolio.
Start simply and assume that we have $100,000 to invest and we’re going to risk 1% of our portfolio on each of our investments.
To calculate our position sizes using the above volatility levels we simply take $1,000 for each position and divide it by the volatility.
Using JNJ as an example, we divide $1,000 by 11.3% to get $8,850. We can invest $8,850 in JNJ and only risk $1,000. If our $8,850 investment in JNJ falls by 11.3% then we would have lost $1,000. Get the idea?
This is easily done by using the Position Size calculation tool that is available under the “Research” tab.
Here’s how that looks (rounded to the nearest dollar) for our list of investments:
Isn’t that amazing? In order to equal risk on both JNJ and TSLA, for example, we can invest $8,850 in JNJ and only $2,315 in TSLA.
Why would anyone want to invest any other way?
Your TradeStops Customer Success Team