Shift in investment style to less volatile after go-live of Risk Rating?

9th May '17 by picker

4 comments 4845 reads

Bearing in mind that markets are at all-time highs, did you start to adjust your investment style to a less volatile, especially after the go-live of the new Risk Rating here on Stockopedia?

Using a combination of high Stock Ranks and some other helpful criteria (Z-, F-, M-Score, PE, PB ratios, etc.), the equity curve has shown a nice development so far, especially due to a diversified approach (NAPS-style like).

Still, I was surprised to see how "adventurous" my investment style was when the Risk Ratings were added to the folio overview.

When selecting my next stocks, for sure the Risk Ratings will be taken into consideration in order to "calm down" a bit with regards to potential volatility.

As a next step, it would be great to have a pie chart in the folio overview showing the share of the individual Risk Ratings.

Unlock with Email

Unlock with Google

Already have an account?
Login here

Mechanical Bull

9th May '17

I have just been reading an NYT article pointing out that stock market volatility is reaching record lows:

https://www.nytimes.com/2017/05/09/upshot/the-stock-market-is-weirdly-calm-heres-a-theory-of-why.html?smid=tw-share

Therefore given that these Risk Ratings are all relative "adventurous" stocks today should on average have lower recent volatility than those from say, five years ago.

WarrantStar

The current market favours more speculative growth companies. If you are worried about a market reversal, then I would suggest that you take a profit on one of your more speculative holdings and buy something a little more conservative. Of course you will hear many that claim to know what stage of the economic cycle is around the corner. The reality is that no one really knows that. A balanced approach would be to hold a good spread of Stockopedia Risk ratings.

Dan_Thomas

10th May '17

I'm not sure that I agree that your balanced approach would lead to outperformance relative to just picking on StockRank though. In my own portfolio I have noticed that I have something that looks a bit like a normal distribution over both size and volatility (Risk rating). Initially I also thought that the best way to go would be try and even things out but now I'm not sure.

I'm now thinking that more of a "barbell strategy" might be the way to go. My intention is to tilt part of my portfolio towards high stock rank, small conservative stocks, in this way hoping to achieve a fairly stable core holding whilst also capturing size, value and momentum factors. At the opposite side of the barbell I am thinking of developing a selection of high stockrank, large, speculative shares. The role of this part of the portfolio is to, hopefully, capture the upside of any volatility whilst using stockranks to mitigate downside volatility. I am aiming at large caps rather than small caps here because in the event of something going significantly wrong my theory is that large caps are more likely to survive any upheaval.

I think that such an allocation should provide better access to factors driving a positive return than a balanced approach across risk ratings. I would definitely appreciate hearing a counter argument though as there are some companies on my watch list that look pretty tasty which don't fit the plan. I guess this is where discipline comes in https://www.youtube.com/watch?v=0mWc1Y2dpmY

(First use of message board - a little bit daunting)

Edward Croft

Dan, great to have you contributing in the comments. The last thing anybody would want is for it to appear daunting to post a comment ! I think you'll find that if you continue to post such erudite thoughts you'll get some great feedback.

More to the point - it sounds a fascinating and well thought out approach.

Since the Risk Ratings have launched I've been thinking about how to use them in my own spread betting account. I use a long/short leveraged approach across the StockRanks, with sector diversification. I'm considering moving towards overweight longs in Conservative/Balanced high ranking stocks and underweight shorts in Speculative low ranking stocks. This in theory should create a fairly market and risk neutral portfolio. Due to short constraints on IG I would have to be overweight in large cap shorts. I need to do some calculations to figure it all out.

Shift in investment style to less volatile after go-live of Risk Rating?

Unlock the rest of this article with a 14 day trial

About the Author

Picker

4 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...