Tag Archives: risk contribution

How to understand the figures of my portfolio to obtain better results? (II)

We have already written about some relevant figures to manage your portfolio, as the performance evolution, the weight of the assets and the relationship between performance and volatility. There are three other parameters to take into account for your portfolio. They are related to the diversification of the portfolio assets.

It is always said that diversification limits risks and helps avoid high losses. It depends on how it is considered. For instance, you can have several assets, but it does not mean that the whole portfolio is diversified. On the contrary, it can have a low diversification, if the assets are very correlated. In this case, a movement in one of your securities has effects in the others.

Another relevant item to obtain from your portfolio is the risk contribution. These figures explain the proportion of each security to the whole risk of your portfolio. This analysis helps take decisions, as selling a share or a fund if the risk is high related to the performance that it provides to the whole investment.

Risk contribution in a T-Advisor portfolio

In the chart above, it is possible to see the different risk contribution of each share to a specific portfolio focused in Germany. If we compare this chart with the weight of each asset, IWKA is the largest, following by Dialog Semicon. However, both have provided the highest unrealised gains (59% and 46%, respectively). On the contrary, BB Biotech AG has unrealised losses of 78.5%, but the weight is 1.83% of the portfolio. That is why its risk contribution is so low.

Finally, the last measure about diversification is diversification benefit. We have already commented about it, but it is interesting to connect this figure with others to analyse the portfolio. Diversification benefit quantifies how much you earn or how much you avoid losing if you diversify your investments.

Diversification benefit in T-Advisor

As the table shows, a diversified investment protects against higher risks, if the investment cycle is negative for you. In this case, the investor is avoiding losing a 24% more.

In T-Advisor, you can also check your diversification in the “follow up” tab of your portfolio report.

diversification follow up in T-Advisor

As you can see in both articles, it is necessary to analyse your investments from different points of view and connecting different figures to understand the quality of your portfolio. If you do not understand some of these figures, you will have to deal with troubles for your money.

My goal in bearish markets: capital preservation

Markets are currently very volatile. We have lived a strong bearish period, but it is not sure that the bulls are coming, as the trend is not clear yet. In this case, panic is the worst adviser. On the contrary, investors have to analyse properly their portfolios to take right decisions. If you are not a trader, if you are a long-term investor, then you have to assume that it is difficult to avoid losses in some periods, moreover when all markets are dropping. So, your goal has to be another: capital preservation.

What does capital preservation mean? Your goal as investor must be to keep your assets with the less possible losses or, of course, to obtain benefits. As there are many changes in the long term, then you have to concentrate your worries in the bearish times: how much are you losing? The success is not to lose or lose less than the reference markets, but how can you get that information? The answer is smart benchmark.

Smart benchmark chart in T-Advisor

The picture above is very clear: my portfolio is losing, because I have invested in a market that is going hard into negative, but I only lose -2.4%, while the reference market (the smart benchmark) loses -14%. Not bad, huh?

As we regularly say, it is important to have available the right tools to analyse your investments and take decisions. Capital preservation has to be your first goal. Don’t lose money or lose the least. Then it the bullish times, your goal has to be to outperform the reference market.

The following chart is even clearer:

Portfolio risk figures

My Germany portfolio is much better than the benchmark: quite less losses in a bear period, less volatility and better Sharpe ratio.

What other tools do I have to consider risks in order to preserve my capital?

  • Analyse how your positions contribute to risk your portfolio. In this case, you can find out if you have an uncomfortable asset to be substituted.

Risk contribution chart in T-Advisor

Risk profile comment with portfolio risk in T-Advisor

  • Consider the diversification. In bearish periods, diversification is a great help to avoid hard losses. You can analyse it with the diversification benefit, that compares how much you win if your portfolio has different assets:

Diversification benefit in T-Advisor

  • Look at the Value at Risk, which measures the probability of having a certain level of losses. As you can see, my portfolio has the worst VaR, what means that I have to consider some changes in my allocation to avoid future losses.

Portfolio risk table in T-Advisor

All these figures will help you to understand your current position and risk. Then you can decide if you have to rebalance totally or partially your portfolio. The strategy is clear: keep your capital and set your portfolio to lose less in bad times and outperform the benchmark in growing times.