Today, we’re going to look at two of TradeStops’ most powerful tools – the “Asset Allocation” and “PVQ Analyzer” tools.
Both of these are accessible under the “Research” tab at the top of the TradeStops website. (Click here if you prefer to watch the video presentation of this information.)
Let’s take a look at how they work.
Here is a portfolio of 8 stocks that are part of the Dow Jones Industrial Average. The value of the overall portfolio is about $70,000. All of these stocks have had SSI Entry signals and all have a low Volatility Quotient. We’ve sorted the stocks by their VQ% ranking.
These stocks have a very low VQ%, ranging from 10.9% (PG) to 15.1% (CSCO).
Let’s go back up to the “Research” tab and click on “Asset Allocation.”
This gives us the allocation of the portfolio, first by Sector.
The eight stocks in our portfolio have us invested in six sectors. This is a good example of a well-diversified portfolio.
We can also see the industries within the sectors by selecting “Industry.”
Let’s see what effect this diversification has on the volatility of the entire portfolio.
To do that, we go to the “PVQ Analyzer.”
The Volatility Quotient of our portfolio is only 9.82%. This is a full percentage point below the VQ% of the least-risky stock in the portfolio.
After applying the Risk Rebalancer to this portfolio, we have lowered the risk of the portfolio to 9.76%. We are taking 1.60% risk of our entire capital in each of the eight positions (about $1140 each).
Now, let’s look at a stock that has high volatility. Barrick Gold (ABX) is one of the gold mining stocks. Its VQ% is 39.38% – more than double the VQ% of CSCO, the riskiest stock in the portfolio.
Knowing that we’re taking $1140 of risk per position, we can go to the “Position Size” calculator under the research tab to determine how many shares to add to the portfolio.
The results show that we can buy 138 shares.
Let’s add this to our portfolio and see how that changes the Asset Allocation.
We now have a small percentage invested in Basic Materials. Now, let’s see what this change did to the Portfolio Volatility.
We’ve actually lowered the overall risk to 9.70%!
As you know, when the “market” goes down, some stocks go up. And vice versa. By having a highly diversified portfolio, you can actually lower your risk by adding a stock with a high VQ%.
We recommend that you apply this methodology with some of your conservative portfolios. You can look at different “what-if” scenarios by duplicating your “Investment” portfolios into “Watch” portfolios and try adding or subtracting stocks to see the effects on your investments.
- Asset Allocation
- PVQ Analyzer
- Stock Analyzer
- Position Size Calculator
- Pure Quant Tool
- Risk Rebalancer