How to Assess Your Portfolio’s Risks

Here’s an outline for a rough “position sheet” that will give you a great view of your portfolio’s risks and rewards and help you choose the best stocks to buy. It’s relatively easy to set up on a spreadsheet.

The inputs are simple: Stock, purchase price (include commissions!), current price and stop-loss price. This stop-loss can be a standing order with your brokerage house, or a mental stop that you will adhere to. The key is to have a stop-loss level for EVERY stock you own. That doesn’t mean you won’t hold a stock for many months, but it does force you to think about where you’d sell your stock if things went awry.

With this data, you can easily calculate three key numbers.

First, of course, you can calculate your current profits and losses in all your stocks. Nothing revolutionary there; your brokerage house probably does that for you anyway.

Second, you can calculate all your potential profits and losses. Let’s say you bought a stock XYZ at 50, and now it’s 55—i.e., you have a 10% profit. But your stop-loss is still at 45 … a 10% loss. Looking at your potential profits and losses will force you to keep your feet on the ground (because an unrealized profit is just that … unrealized) and think about raising your stop.

Third, you can calculate your potential “drawdown.” It’s very similar to step two, but in this case, you’re examining your whole portfolio. Basically, you’re asking yourself, “If all my stops were triggered tomorrow, how much would my portfolio go down? And how much would I still have left?”

It’s pretty easy to calculate. Using the above example with stock XYZ, your risk is 10 points—from the current price of 55, all the way down to your stop at 45. If you own 100 shares you have $1,000 of potential drawdown (10 points, multiplied by 100 shares) for that one stock. Doing this for all your holdings and adding them up will give you your total drawdown potential.

Lastly, you simply add up all those figures, and subtract them for your current portfolio’s total value. That is your “worst case” scenario that tells you what you’d generally be left with if everything hit the fan at once.

Why go through this number crunching? The major benefit is that it forces you to watch your portfolio’s risks in a systematic way—something few investors ever do. Most investors only dream of the upside and shrug at the potential downside.

Try putting together a position sheet for yourself and update it a couple of times per week. It might offer you a new perspective of your portfolio!


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