IN volatile market conditions, one needs to be aware of the risk ones portfolio is facing. The simplest way is by calculating the beta of your portfolio.
In financial terms, beta is the measure of your portfolios volatility. A beta of one would indicate your portfolio is not more volatile, nor less than the market as a whole. If your portfolio beta is more than one, then it means your portfolio is more volatile than the market, while less than one indicates it is less volatile.
In these days, a lot of portfolios show losses. This causes investor panic, leading to hasty or sentimental decisions. However, if you believe in stocks, absorb the paper/notional losses without panicking and make your decisions based on hard facts.
One calculates portfolio beta by the weighted average of each individual stocks beta in your portfolio. Portfolio beta is a very important part of making a portfolio, as it takes past records into consideration. It also helps us know how the portfolio would react in relation to a particular benchmark, and if it fits within the clients requirement.
Generally, during bullish times, a high beta is preferred, and one could choose funds or stocks with a higher beta (more than one). While during volatile and uncertain times, or when the markets are bad, a lower beta is better.
While a beta is not the foremost decision on which an investment is made, it is essential. It helps determine how much risk a particular investment carries and how it affects your overall portfolio.
If a client is bullish on a particular stock, sector or asset class, based on the data available, one can calculate how much more exposure the client can take in that investment. Beta allows us to determine how much will a particular investment will affect the overall portfolio beta, and based on how much more risk one is willing to take, we can accordingly allocate the funds.
When one is being swayed more by sentimental market movements, pressure and other hearsay, calculating the beta would help understand the risk one is taking. Company fundamentals and macro and micro economic factors are useful, but portfolio beta is a more personal tool to check how the portfolio is looking vis-à-vis the market as a whole, and base decisions on how comfortable you are with your current portfolio beta.