TutorialsIntermediate· 7 min read

Tutorial: stress test your portfolio before the market does

The one thing to remember

Every portfolio has a hidden single bet in it. The exercise is to find yours before the market finds it for you.

What you will be able to do

Discover the bet you did not know you had made.

Figure

How stress test your portfolio before the market does works, in one picture

The same argument as the text, as a chain. Each step is what makes the next one possible.

Figure

Volatile is not the same as risky

The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.

1
Group your holdings by what would actually hurt them
My Wealth
Not by sector label. By risk. A chipmaker, a data-centre REIT, a power utility and an index fund with heavy technology weighting are four different tickers and one bet. If AI capital spending stalls, all four fall together, and your diversification turns out to have been cosmetic.
Diversification comes from low correlation, not from the number of names on the list.
2
Ask what a rate shock does
Rank your holdings by how far in the future their profits sit. Rates rising by two points does very little to a business earning cash today and a great deal to one whose value is all in the 2030s. If most of your portfolio is 'the future', you own a leveraged bet on interest rates without ever having bought a bond.
3
Take each holding to zero, on paper
For every position, ask what a total loss does to the whole portfolio. Not what a triple does. If any single answer is 'catastrophe', that position is too big, no matter how good the idea is, and no matter how certain you feel.
4
Then check you could hold through a 40% fall
Not whether you would want to. Whether you could. If you have borrowed, or you might need the money, or you know you would capitulate, then the honest answer is no, and the position should be smaller today.

Try it

How many stocks is enough?Interactive

Number of stocks10

Correlation between them60%

One stock

30%

Your portfolio

24.0%

Floor you cannot cross

23.2%

Drag correlation to zero and risk keeps falling as you add names. Push it to 100 and adding stocks does nothing at all: you own the same bet many times.

You have got it when

You have named the one macro event that would hurt most of your portfolio at once.

Go and do it in SteadyShares

Tutorial: stress test your portfolio before the market does

How stress test your portfolio before the market does works, in one picture

Volatile is not the same as risky

Group your holdings by what would actually hurt them

Ask what a rate shock does

Take each holding to zero, on paper

Then check you could hold through a 40% fall

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