Editor’s note: We’re rounding out our series of classics from Porter Stansberry with an important checklist that most investors overlook. In this updated excerpt from a DailyWealth essay – most recently published in 2018 – our founder discusses how to zoom out and cut back on risk across your investment portfolio.
The greatest investors in the world already know this secret…
It’s so simple, but it can make you a better investor overnight. It will transform a losing portfolio into a winner. And it has nothing to do with the stocks you buy.
It has to do with two ways to sleep well at night knowing your portfolio is prepared for anything that may come.
Here are the two things you should do this year (and every year)…
No. 1. Make sure you truly understand how much risk you’re taking.
I’m frequently astounded (and terrified) when I talk to individual investors and they start describing their strategies. A portly gentleman wearing overalls told me proudly at a Casey Research meeting once that he’d mortgaged his house to buy junior mining stocks. He wasn’t worried about the pullback (which became a grinding, four-year bear market and probably wiped him out) because he was diversified across more than 30 different tiny companies.
The best way, by far, to understand how much risk you’re taking in your equity portfolio is to use TradeStops.com. I don’t know of any other software system anywhere that allows you to easily (and automatically) enter your brokerage information and quickly receive an accurate assessment of the volatility of your actual portfolio.
TradeStops can tell you exactly how much risk you’re taking, both with your portfolio as a whole and across all of your individual positions.
My bet? If you’re managing your own portfolio, you’re probably taking at least twice as much risk as the S&P 500 Index. That is, if a bear market strikes and stocks fall 20%, your portfolio will most likely fall more than 40%.
If you don’t know how much risk you’re taking, you’re much less likely to guard against those losses. But if you do know how much risk you’re taking and which positions are the riskiest of all, you can do a much, much better job of running your portfolio safely.
By the way, if you use a broker or an asset manager, it’s even more important for you to have this tool and this information. Why? Because you’ll have a much better sense for whether or not he’s doing a good job… or just taking a lot of risk in a bull market. (Telling him where he’s taking too much risk will also let him know …….