|By Nathan Young|
May 19, 2017
Value at risk is a way to measure how risky your investments may or may not be. Many places use this to figure out how much a current or potential investment could lose given the current market conditions.
When looking at investments, whether it is through your own research or a broker’s research, you will want to know the potential draw back of a fund. In theory you can lose everything as the fund can become worthless, but there is typically a number that will give you a drawdown estimate if the worst were to happen. This is important because you can plan an exit strategy if you so choose.
If you have your own personal portfolio, you can implement the value at risk tool to find your current level of risk in the current market conditions. Risk is extremely important to measure because everyone expects their investments to increase, but when the market turns, many forget about the negative sides and do not have a plan in place. There will always be corrections and drawbacks so you must have a plan in place to ride that wave and survive the valley and thrive at the peaks.
Now this is just a measurement and may not occur or could be slightly off, so do not live and die by this data. It certainly is important and should be implemented to give you an idea of what could happen, but implement others to try and back up the numbers. If you go through an investment firm, question them on this and ask them what their numbers are for your current investments. You can then take the numbers home and complete your own research and see if you need to adjust anything.
Rounding everything out, risk is extremely important and needs to be monitored closely as you do not want too risky of a portfolio. Depending on your age and risk tolerance, you may want a little more risk because that typically means more returns, but you do not want a recklessly risky portfolio. Bounce ideas off people in an investment community and see what they think of the value at risk numbers for your current situation, as this will be real time feedback. If anything, as for clarification from your investment professional and the talk with them about what you want for the future.