Yesterday the markets dropped all of 1%, and the panic headlines started rolling in.
The sky is falling.
The bubble is bursting.
Or whatever fear-based news angle you might’ve seen.
Let’s pump the brakes for a second.
First of all, I’m not panicking over a 1% move and neither should you. In fact, when the markets move down, I start rubbing my hands in anticipation.
Let’s face it… if you’re panicking over a 1% move, now is a good time to look over your portfolio to see if it passes the “Beta Allocation” test.
What “Beta” means in the context of portfolio allocation
Beta measures how sensitive a stock (or a portfolio) is to movements in the overall market – usually compared to the S&P 500.
Think of it like this…
Essentially, the major market average is a “1 beta.”
So if your portfolio is down 1% when the markets move down 1%, then you’re perfectly correlated to the major market average. Overall, your portfolio should be down anywhere from .75 to 1.5% when the overall market average drops 1% depending on your weighting of risky assets to non-risky assets.
If that’s you – then congratulations – you passed the beta allocation test.
However, if your portfolio is down more than 5% after a 1% down move, then you’re in the wrong stocks.
Of course, there are some exceptions to this rule.
For example, if you had a stock that’s getting hammered because of an individual catalyst like earnings, then your portfolio is going to be down more on that specific day.
But if your portfolio is constantly down 5% every time the market moves down 1% – that’s not good. Imagine if the market corrected 20% instead of 1% – you’re going to get absolutely hammered.
How to use beta allocation to manage risk
Instead of thinking about sector weights and individual tickers, think about how much “market sensitivity” your portfolio is taking on.
Let’s say hypothetically your portfolio looks something like this…
– 50% in the S&P 500 (average beta = 1). – 30% in small caps (higher beta = 1.2) – 10% in gold (low beta = 0) – 10% in long-duration treasuries (negative beta = -0.3)
That’s a beta-weighted mix.
If you took the average of those beta numbers, your portfolio’s overall beta might be around 0.85-.9 – meaning you’d capture about 85-90% of the markets swings.
But if your portfolio is overexposed to high-beta names like Nvidia (NVDA) or Tesla (TSLA), then you’ll experience sharper drawdowns when the market dips.
This is why we show traders how to balance and manage risk in Catalyst Cashouts, with beta allocation being a good way to measure how protected you are from market swings.
YOUR ACTION PLAN
Yesterday’s 1% down move should be a good test to your beta allocation.
Take a look at your portfolio to see if you pass the test.