With 2004 Winding Down, Do You Know How Much Risk is in Your Investment Portfolio?

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ItÂ?s an age old question that many investors have faced for many years. How much risk is inherent in a given investment portfolio? More importantly, how can one quantify portfolio risk in simple terms that a lay person can easily grasp?

Many finance professionals and Investment Advisors will quickly declare that risk is measured in terms such as volatility and standard deviation. Although theoretically correct, these terms make little sense to individual investors who don’t have an advanced degree in Finance or Statistics.

“Many investors consistently underestimate the level of risk in their portfolio or, even worse, have no idea how to quantify the risks they are taking” says Mohannad Aama, portfolio manager at Beam Capital Management in New York, whose firm offers a complimentary portfolio review that analyzes total portfolio holdings and assigns client portfolios a simple numerical grade that is easily comparable to the overall market risk as measured by the S&P 500 index. If a particular portfolio is given a risk grade of 1.5 for example, then that portfolio is expected to be 50% more risky than the overall market. Correlation with the S&P 500 is only one risk factor that investors need to consider. According to Mr. Aama, investors have to also keep track of concentration risk and Interest rate risk as well.

Concentration risk is when a portfolio holds too few stocks or when too few industries or sectors are represented in a given portfolio. “Many investors assume they are properly diversified if they own several Mutual Funds in addition to a stock or two that they personally favor. In reality, many of these Mutual Funds might hold pretty much the same securities making you often have a portfolio that is not as diversified as you think. The proper way to tackle this problem is to analyze the effective holdings of your portfolio by digging into the holdings of each Mutual Fund that you own” added Mr. Aama. Interest rate risk is basically the effect of a change in interest rates that will have on your portfolio. This is most pertinent for Fixed Income portfolios according to Mr. Aama. Portfolios that exclusively hold Fixed Income instruments or have a high concentration of Fixed Income are more exposed to a change in interest rates than an equity portfolio for example.

“The end of the year is an ideal time to review investment portfolios and perhaps change things around, if necessary, to take advantage of any possible tax efficiencies and in order to position your holdings for the next year” claims Mr. Aama. Knowing how much risk in your portfolio is only half the equation, knowing if that level of risk is appropriate is another issue. “That is a subjective matter that depends on each individual investor and their specific appetite for risk as well as their ability to withstand that risk; both financially and psychologically” added Mr. Aama.

Those interested can obtain a personalized complimentary portfolio risk review that covers market, concentration, and interest rate risk by logging to http://www.beamcap.com and entering their individual portfolio holdings online.

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Mohannad Aama