The untold truth about portfolio risk assessment on eToro

Over the years, eToro has developed a system that, based on not entirely explicit algorithms, assesses the risk of a given investment portfolio on an ongoing basis. The risk is scaled from 1 to 10, where 10 is the highest risk.

As long as the person and their wallet are not in the Popular Investor program, they can operate any risk. However, being a Popular Investor, this risk cannot exceed 6. This is to protect the copying capital from exposure to high risk (eToro's official position). The problem is that eToro offers its own CopyPortfolio products, on which it often reaches a risk level of 8 and yet they can be copied and are not blocked like Popular Investors accounts, which have exceeded the level 6.

What influences the risk assessment?

eToro officially describes it here: https://www.etoro.com/news-and-analysis/etoro-updates/risk-score-calculation/ Therefore, in general, it can be assumed that the more companies we have with large fluctuations during the day or week, the greater the chance of increasing the risk.

There are several other factors that eToro does not officially mention that significantly affect your risk assessment. These are among others:

• positions with a large loss (over 25%) that weigh close to 5% of the entire portfolio

• no uninvested funds on the account for possible future investments.

To get rid of the first issue, Popoular Investors are sometimes forced to make unfavorable decisions that sanction a loss by liquidating or reducing such positions, even though they would have a chance to recover in the future.

For the second issue Popular Investors use another "trick", but at the expense of potential profits for copying investors. The trick is to keep some of your capital uninvested. In some cases, this uninvested capital reaches even 50% of the portfolio, which means that only $ 500 actually works from the copied $ 1000. I do not need to explain what effect this has in the long term ...

Most people want to invest safely and with high returns. So they choose investors with a risk of 4 or 5, but they often do not pay attention to the fact that almost half of their capital is not working and only officially "waits to be invested when there is an opportunity". To check what level of funds is not invested, just click on "portfolio" of the given Popular Investor and scroll to the bottom of the screen where the free balance of the account is displayed.

In my opinion, maintaining a free balance at the level of 5-10% of the portfolio is actually justified by looking for investment opportunities. However, anything above these levels is poor portfolio management or an attempt to artificially lower your risk.