Testing Your Sword: Three Checks for Any Portfolio

A sword is only as good as its balance. Before you change a portfolio, it helps to know how it is balanced today: how much rides on one company, whether its swings have suddenly grown, and how far it has fallen before. These are measurements, not verdicts. This lesson explains three of them, the same three ShieldWall takes on the holdings you save.

Check one: concentration
Concentration asks how much of your invested money sits in a single stock. If one company is 40% of your holdings, a bad quarter for that company is a bad quarter for you.

• How it's measured: each stock's market value divided by the value of everything you hold.
• ShieldWall's default limit: it flags any single stock above 10% of invested holdings.
• Funds are different: an index fund already spreads money across many companies, so ShieldWall counts funds as diversified. It doesn't yet look inside them, so two funds that hold the same large companies won't show that overlap.

A limit is a choice, not a rule. Some investors deliberately hold a large position in a company they know well. The check makes sure the choice is a conscious one.

Check two: volatility regime
Volatility measures how much a portfolio's value moves from day to day. What matters here is change: a portfolio that has always swung a lot is different from one whose swings have suddenly doubled.

• How it's measured: the annualized volatility of your holdings over the last 20 trading sessions, compared with the 60 sessions before.
• ShieldWall's default limit: it flags when the recent period is more than twice as volatile as the earlier one.

A flag here doesn't say what happens next. It says the ground is moving faster than it was, which is often when people make hurried decisions.

Check three: drawdown
A drawdown is a fall from a peak to a later low. It answers a blunt question: if you had held exactly these holdings, what was the worst stretch?

• How it's measured: your current holdings, at today's weights, carried back over the last two years of daily closes.
• ShieldWall's default limit: it flags a peak-to-trough fall deeper than 20%.
• One-day loss: it also reports, in dollars, the one-day loss that 95% of days stayed under.

History sets no floor. Holdings that never fell 20% in the last two years can fall further in the next two. Drawdown shows what these holdings have already done, so the number isn't a surprise the first time you see it.

Reading the results
Each check comes back clear, flagged or not measured. Not measured means ShieldWall lacked the data, such as a holding without US price history, and it says so instead of guessing. Every finding shows the number behind it and the limit it was compared with.

None of these checks tells you what to buy or sell. They give you facts to weigh before you decide, or to bring to a conversation with your advisor.

Try it on your own holdings
The free portfolio scan runs the concentration check on any list of tickers and dollar amounts, with no account needed. Create a free account to run the volatility and drawdown checks and save the portfolio.