Saturday, October 13, 2012
How Daring Are You?
A new site offers a portfolio based on your stomach for losses. Figuring your “desperation” amount.
Many sites and services will assist you in building a stock portfolio—some more successfully than others. A promising new one, Riskalyze, was launched recently with unique features that are worth a look. It’s free, which is the kind of financial risk we like.
Riskalyze (riskalyze.com) helps you construct your “risk fingerprint.” You start by entering the approximate size of your portfolio, as well as your “desperation amount,” the bottom-line figure that would, if you went below it, force you to make some uncomfortable life changes. Let’s say your portfolio totals $500,000 and your desperation amount is $250,000. You’re also asked a series of questions that aim to quantify your attitude toward risk, such as, What would you do if your portfolio notched a gain of 10% or a loss of 8%? Will you take the straight gain or loss, or flip a coin, hoping for a larger gain but knowing it might result in a larger loss?
The questions are interesting and result in your being assigned a risk number. My number was 36, which suggests a low to medium amount of risk-taking on a scale of about 20 to 90.
Once your risk number is determined, you can choose to build a portfolio based on a handful of ETFs, or one that searches across a database comprising 38,000 U.S.-based stocks, ETFs, and mutual funds. The portfolio has a 95% probability of staying within your risk-tolerance range over the coming six months. To achieve diversification, the algorithm limits a single stock or ETF to a maximum 15% of your portfolio.
The portfolios are created using Modern Portfolio Theory, which posits that investors can maximize return for a given amount of risk. Market performance and volatility calculations are generated by a capital-asset-pricing model. You can put some high-level restrictions on the portfolios, like excluding mutual funds, or you can replace the recommended investments with others that you already hold.
You can use all or part of the resulting portfolio; if you mark a position as “invested,” Riskalyze then monitors it and lets you know when to rebalance to control the risk level. You get updates every other week.
At present, implementing a Riskalyze portfolio recommendation involves some manual labor. Or you can find an advisor through the Riskalyze site who will do the work for you. This site seems ripe for a partnership with an online brokerage.
OptionsHouse (optionshouse.com) recently agreed to license the Prodigio (prodigiorts.com) back-testing platform, which was available through thinkorswim prior to the electronic broker’s takeover by TD Ameritrade (ticker: AMTD). Prodigio was a separate company that operated under the thinkorswim banner, but Prodigio parted ways with TD Ameritrade in June. George Ruhana, OptionsHouse’s CEO, says, “We will be Prodigio’s exclusive partner, and the service will hook up to our trading engine.” Integrating the downloadable Prodigio platform into Options-House’s Web-based platform could be a challenge, but Ruhana assures us it will be available in a few months.
We raved about Prodigio when it was first introduced. Among its features are strategy back-testing, pivot studies (often used in foreign-exchange trading), pairs trading, and a complete charting package. Prodigio is capable of helping traders develop and test strategies, and then sets them up to trade automatically. Ruhana wants to add options strategies to the current mix. We’ll let you know once OptionsHouse has Prodigio up and running.
R.I.P. AVALANNA: IT WAS WITH great sorrow that we learned of the passing of Avalanna Routh, on Sept. 26. Avalanna was the 6-year-old daughter of Cameron Routh, a vice president at Scivantage (scivantage.com) who has advised us over the years about the tax consequences of trades. Avalanna was diagnosed with a rare form of brain cancer prior to her first birthday, and she beat all the odds to survive for so long. The Routh family continues to work for a cure; check out their campaign at cureatrt.org.
Published in Barron’s, October 8, 2012.