The Risk/Reward Heatmap is a powerful feature in portfolio construction and review for portfolios with 100 holdings or less. Many advisors use the Risk/Reward Heatmap with clients to demonstrate the diversification of their portfolios. The more gold showing, the more diversified the portfolio is.
In this article:
- Heatmap Walkthrough
- Best Practices for portfolios with more than 100 holdings
- How correlations affect a portfolio
Heatmap Video Walkthrough
Best Practices for Portfolios with More Than 100 holdings
To ensure a snappy analysis, the Risk/Reward Heatmap requires less than 100 holdings to populate the graph. For client portfolios with more than 100 holdings, here are some great best practices you can incorporate:
1) Split apart the accounts in a portfolio into separate portfolios. Advisors will often times duplicate their current portfolio into the proposed portfolio, delete all but the single account they want to work with and view the heatmap for just that one portfolio. You can duplicate your current portfolio by viewing it and click Create Proposal in the upper right-hand corner:
2) Condense similar holdings into a proxy. Advisors will also group similar holdings (usually among asset classes) together and create a single position using its asset class index as the proxy, such as SPY (stocks), MUNI (municipal bonds), VNQ (REITs), etc. The quickest way to do this is by toggling the account type to "SMA/UMA" and entering in the ticker symbols that represent the risk of those investments. Here's a short gif that shows these steps:
How Do Correlations Affect a Portfolio?
Want to learn more about how correlations affect an investor's portfolio in Riskalyze? Watch the short video below to find out!
PRO TIP: For an interactive walk-through of the power of the Risk / Reward Heatmap, check out our Riskalyze Academy Lesson.