You’ve done all the research. You made sure that your stock portfolio is well diversified by sector and industry. You used the Risk Rebalancer so you know you’re taking the right amount of risk for each position. The SSI Alerts are in place. Time to head to the golf course, right?

Hold on. What are you doing to monitor the change in risk in your investments?

What? Change in risk? But you said I should only rebalance my portfolio on a yearly basis. What do you mean?

Before we go further, here’s a little background. We received an email from a new TradeStops member who wondered why he needed TradeStops.

He is overweight Asia because he thinks those stocks are undervalued. He has positions in very conservative income portfolios that have Volatility Quotients of 5%, the minimum VQ% in TradeStops. And he also has some other stocks that are a little riskier.

His Portfolio VQ% is below 6%. After using the Risk Rebalancer, the PVQ% was slightly lower, but it required that he make some major changes to his portfolio that he didn’t want to make. He said he didn’t want to make the changes as his portfolio is invested exactly as he wants it to be.

So why does he need TradeStops?

This well-intentioned investor is making a potentially catastrophic mistake! How?

He has spent so much time constructing his portfolio for today’s market conditions that he has completely forgotten that risk changes constantly!

The risk his portfolio is subject to today will be different next year. And the low-risk positions could be the ones that cause him the most damage.

Let’s take a look at a low volatility ETF…

LQD is the ETF for investment grade corporate bonds. It is considered a very safe investment with little risk. The Volatility Quotient is only 5% which is the lowest VQ% in TradeStops. And the VQ has been at 5% for 3 years.

stock portfolio

So this is a risk-free investment, right?

No, it’s not.

Let’s look back at the beginning of the 2008 bear market. The VQ of LQD was 5% back then as well. And then the volatility shot up 40% in a matter of months.


And the price of LQD dropped 20%.


And this volatility is from supposedly safe investment grade bonds!

Do you think that this type of volatility increase can occur in the future? Of course.

Are interest rates going to stay low forever? No, of course not.

So how is this investor supposed to use TradeStops?

One of the most powerful features of TradeStops is the Risk Rebalancer. Yes, we don’t recommend that you actually rebalance your portfolios often. But the Risk Rebalancer is more than just a tool to be used once a year.

The Risk Rebalancer is also the best tool to track the change in your portfolios’ risk over time. It allows you to see which stocks are getting riskier and which are becoming less risky. Here’s an example.

We did a webinar for our friends in the UK a couple of weeks ago. During the webinar, we created a simple portfolio of three different stocks. We used the Risk Rebalancer to equalize the dollar risk in each position. Here is that portfolio.


We ran the Risk Rebalancer on this portfolio just one week later and here are the results.


As you can see, the Risk Rebalancer is showing that the portfolio has changed a small amount already. Over time, you can use this to see which stocks are doing better and which stocks are doing worse and their effect on the volatility of your portfolio.

One wouldn’t expect much change in a week and there wasn’t much change. But in 3 month or 6 months, you can see what is happening in your portfolio from a risk perspective. We’ll keep this portfolio and track the changes in a few months’ time.

Risk is always changing. You have to be aware how these changes are affecting your portfolios. The Risk Rebalancer is a great tool to help you understand these changes.

Tom Meyer,
Member Services, TradeStops