With the bull market raging again during the last week of April and portfolios growing substantially, it is an appropriate time to consider the current risk of one’s portfolio. According to Investopedia, “Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.” More specifically the comparison is between a portfolio and a benchmark. The benchmark most often used is the S&P 500. It is an excellent choice because it is diversified, and we hear its performance daily.
If an investor and his advisor don’t know the beta of his portfolio, then they are missing out on a great deal of information. In essence, an investment advisor’s job is to get the highest return possible for the lowest beta. For the author of this article, this is the most important aspect of his research. Talking to clients about beta provides the advisor with insight into an investor’s risk tolerance. It is normal for a client to have trouble pinpointing her risk tolerance. Most of the time, investors will say they want to be aggressive. Although they say let’s be aggressive, investors are always upset if they lose money. A discussion about the S&P’s historical performance, and then comparing the investor’s portfolio to the S&P gives him a much better means of identifying risk tolerance, than simply asking “What is your risk tolerance?”
It is quite often more fruitful for an investor to start with a conservative beta and work upwards, than for her to begin with an aggressive portfolio and reduce the beta as time goes. A beta of 1 is equivalent to the volatility of the S&P while a beta of less than one is less volatile than the S&P. Finally, a beta above 1 is more volatile. It is suggested to start below a beta of 1 and work up the volatility scale as time goes. As Warren Buffet says, “Don’t Lose Money.” It is a much better strategy to earn a little less than what is hoped for upfront, than losing a great deal more than the S&P on a percentage basis and then trying to recover.
If you would be interested in learning the beta of your portfolio and some other options across the risk spectrum, then contact us at Innovative Investment Solutions, Inc. And, remember don’t invest without knowing your portfolio’s beta.
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The information presented and made available in this article is intended for educational purposes only. The information is not and should not be confused with investment advice and does not attempt or claim to be a complete description of any specific securities or markets. This information is of a general nature and has not been prepared with regard to any particular person’s investment objectives, financial situation and/or particular needs.
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