Few people -- and I'm one of them -- really understand the risks
we take when we build our portfolios. Is that biotech stock that
climbed 17% last month really worth the risk -- because it might
just as easily drop 23% on a day's worth of bad news? Is that
cold-as-clay mining stock even riskier -- given that it has returned
zilch over the past five years?
A handful of new Web sites will crunch the numbers for you and
provide answers to questions like these. Visiting RiskGrades, Total Sum and PortfolioScience.com is a little like taking your
portfolio to the doctor for a checkup. You may discover festering
problems that have contributed to your performance fatigue, or --
worse -- a ticking time bomb that could send your holdings into
arrhythmia at any moment. Here's a quick tour of all three sites.
This site was launched by a company called RiskMetrics,
once a part of J.P. Morgan. RiskMetrics has provided risk
analysis on holdings of large institutions since 1994. Enter the
stocks, bonds or funds you own, and the site generates a revealing
chart that compares the risk levels of each holding vs. its
potential rewards. Stocks or bonds plotted above the red line on the
chart provide sufficient reward potential for the risks they carry.
Those that fall below the red line don't. What could be simpler?
RiskGrades also lets you play what-if games. For example, suppose
you wanted to know the risk level of your portfolio if you sold off
a certain stock. Just check the "sell" box, and the software
rescores your portfolio's overall risk.
At the heart of RiskGrades is a sophisticated calculator that
factors in all the nastiness that can affect your portfolio:
interest rate hikes, currency fluctuations, market
volatility, you name it. When all the
numbers are finally crunched, each of your holdings receives a
number or score. The higher that number, the more you're living
dangerously. The site's builders describe the score as a
standardized measure of volatility. And they claim their measure is
more descriptive than a
score (which I'll talk about below).
Moreover, a RiskGrades score would apply equally to a stock on
the Singapore Exchange or to one in Paris or New York. In other
words, if your epileptic biotech stock received an off-the-chart
risk rating of 400 and you owned a Russian banking stock that also
scored 400, the two would carry the same level of risk.
One of RiskGrades' cooler features measures how well your
portfolio might do if a major bad-news event occurred. The tool even
gives you specific examples, such as the Mexican peso crisis, the
Asian financial crisis or the "dot.com bomb." Simply select a crisis
and you'd get a taste of the pain you'd face.
Total Sum also shows how your portfolio might react to market
events, but maybe in a more objective way. As with RiskGrades, the
first thing you do is create a portfolio made up of funds, stocks,
currencies or indices. Then you can learn what would happen to all
of your positions if one of them took a serious hit. For example,
let's say your portfolio consisted of equal parts of
America Online (AOL:NYSE
and General Electric (GE:NYSE
You could quickly discover how much America Online and General
Electric would decline if Microsoft were to suddenly lose half of
its value. When I did this calculation, the site told me that AOL
would likely decline by $7.22 a share (a 13% fall from Tuesday's
closing price), and GE by $6.15 (a decline of 11%).
Alternately, you can enter an index such as the
and then tell the calculator to factor in, say, a 1,000-point drop
(a mild correction) and see how that would affect your overall
Total Sum also tells you how much risk your portfolio will bear
over a specific period of time. I entered some stocks favored by
active traders, such as Echelon (ELON:Nasdaq
and JDS Uniphase (JDSU:Nasdaq
This time I was informed that there was a 95% chance Genentech
would not fall by more than $8.59 (a drop of 5% based on
Tuesday's close) in a single day. With Echelon the figure was $3.36
(9.3%), and with JDSU it was $6.46 (6%). Of course, the answer
implies there's a 5% chance the stocks will fall by more than the
amounts shown. You can adjust the holding period from one day to a
month or 200 days or whatever.
You can also adjust the odds from the 95% default to, say, 85%.
Ironically, this might be a good screen for daytraders who are
searching for stocks with lots of volatility.
Portfolio Science is maybe the most user-friendly of the three.
And it seems geared more toward less-experienced investors. Enter
your portfolio and the site will show you the risks you face in both
dollar and percentage terms over the course of a day, a week, a
month or even a year's time. You can also compare your portfolio's
risk to holding a simple index such as the
500. One neat feature divides your portfolio into
industry sectors and then shows how much risk each of those sectors
carries. A simple mouse click creates a Java chart that lines up the
stocks you own in order of their risk level.
Risk analysis is a fairly arcane field -- one that has been the
domain of math geeks up until now. When most of us want to gauge the
risk of a stock, we simply call up its beta on sites like Market Edge. A beta measures a stock's volatility
relative to the market. Stocks with betas of 1 move up or down more
or less in tandem with the market. Stocks with betas of less than 1
tend to be less volatile than the market as a whole. Volatile stocks
have betas higher than 1.
As a measure, beta has its limitations, however. If the market
itself is volatile to begin with, then a stock with a beta of 1 or
less still could give you a scary ride.
The calculators on these three sites dissect risk more
thoroughly. All three sites also contain useful tutorials. The one
at RiskGrades, in particular, is excellent. Take it and you'll be
able to outtalk your insurance agent next time he or she calls.
But should you trust these sites when you're thinking about
changes to your portfolio? That's a risk you'll have to take.