A slice of Chocolate Tower Truffle Cake contains 1,679 calories and 51 teaspoons of sugar, and even though it sounds (and is!) unhealthy, most of us would just consume it without much thought.
What if we could “project” the impact of the chocolate cake on your overall health before your consumption? For example, what your fat percentage, arteries, or waistline would look like if you ate that decadent dessert; would that change your mind and help you make an informed decision to minimize regrets?
In our recent customers’ survey, we found out an important yet highly neglected feature by our users – The Risk Manager. If you have been investing without assessing your risk, this article is dedicated to you. 🙂
There are many ways to assess our risks. For starters, let us share a few:
Beta
Beta is often used as a measurement for systematic risk (risk that affects the entire market) because it measures how a stock would react to market movements.
Beta uses a sizable amount of data (at least 36 months) as measurement. Beta that is higher than 1 indicates a stock’s price swings more widely than the overall market. Beta that is lower than 1 indicates that a stock’s price is less volatile than the overall market.
Why should we use Beta? Having a portfolio with different Beta helps to diversify the overall impact when the market crashes. Also, numbers do not lie. It is arguably more reliable than a speech by a company’s CEO.
VaR
For unsystematic risk (risk unique to a company or industry), one metric that StocksCafe commonly uses is Value at Risk (VaR). VaR is defined as the maximum amount expected to be lost over a given time, at a predefined confidence level.
In this metric there are 3 components: Time period, Confidence level, Loss amount.
To illustrate, if a portfolio has a 95% daily VaR of 4%, it is telling us that there is 95% probability that this portfolio will not suffer more than 4% loss in a day.
Value at risk is high when stocks in the portfolio are highly correlated. In other words, it can also be an indication that the portfolio is not very diversified.
allocation
It is important to know how much you invest in each industry, sector, exchange, and asset class.
As the saying goes, “Never put all your eggs in one basket.” The recent crash of the cryptocurrency has caused many investors to be burnt. If you have put a significant percentage of your portfolio into cryptocurrency, you definitely understand what this means.
Risk management is like a health check-up. It is likely that things are okay, but it doesn’t hurt to do a quick check, just in case. It also helps that StocksCafe’s Risk Manager and allocation tools make things easy for you. Check them out today if you haven’t already!
Happy investing!
