Understanding Risk Scores: How Our Overlay Managed March 2026

Risk Score 7 to 3 in Three Weeks: How the Overlay Managed March

From November 2025 through early March 2026, our eToro risk score sat at 7 — the upper boundary of what we consider acceptable during full equity exposure. With the overlay in Accelerating mode at approximately 83% equity, the portfolio was positioned to capture upside in a constructive market. Then March happened. Within three weeks, the overlay systematically reduced equity exposure from 83% to 18%, and the risk score followed it down from 7 to 3. This post explains exactly what happened, what a risk score actually measures, and why a higher number during good times is a feature of the strategy — not a flaw.

What Is the eToro Risk Score?

Every eToro portfolio receives a risk score between 1 and 10, calculated by eToro based on the portfolio's realized volatility over a rolling 7-day window. A score of 1 means extremely low volatility (think: sitting in cash). A score of 10 means the portfolio has experienced sharp swings. The number is not static — it moves daily based on recent price action.

For Popular Investors on eToro, there is a hard requirement: the risk score must remain at 7 or below on a sustained basis. Exceeding this threshold can result in losing temporary Popular Investor status, which affects visibility and copy-trading eligibility. This is why understanding the relationship between equity exposure, market conditions, and the risk score matters.

Here is how risk scores typically map to portfolio behavior:

The key insight: a risk score of 7 during calm, uptrending markets is very different from a risk score of 7 during a sell-off. Our overlay ensures we are only running elevated exposure when conditions support it — and scales down before volatile conditions push the score into unsustainable territory.

The March 2026 Timeline

March delivered one of the sharpest equity sell-offs in recent quarters, driven by war escalation, higher oil prices and deteriorating macro data. Our three-pillar process responded in stages. Here is the exact sequence:

Notice the lag between the overlay's action and the risk score's response. The overlay moved to Cruising on March 4 — but the risk score did not drop from 7 until March 13, nine days later. This is because the risk score is backward-looking: it reflects the volatility that already happened. The overlay, by contrast, is forward-looking: it reads 23 real-time indicators to anticipate stress before it fully materializes.

The F1 Analogy: Braking Before the Corner

“In Formula 1, you do not brake when you are already in the gravel. You brake before the corner, while you still have grip. The overlay works the same way — it reduces exposure while there is still time to protect capital.”

During the months of decent gains from January through February, the overlay kept the throttle open at 83% equity. The risk score of 7 reflected the full-exposure positioning — and that was intentional and it paid off. You cannot capture upside by sitting in cash. But when our indicators began flashing caution in early March — deteriorating breadth, rising credit spreads, spiking volatility term structure — the overlay initiated the de-risking sequence. The shift from Accelerating to Cruising on March 4 cut equity from 83% to 54% in a single day. Three weeks later, the move to Braking brought it down to 18%.

This is the core trade-off of our approach: we accept a higher risk score during favorable conditions in order to capture returns, and we systematically reduce it when conditions deteriorate. The risk score is not a target we manage directly — it is an output of our exposure decisions. We manage exposure; the risk score follows.

Where Did the Losses Come From?

Transparency matters, especially during drawdowns. March MTD numbers: AlphaWizzard -7.9%, SPY -7.6%, QQQ -7.4%. On the surface, these look similar. But the timing tells a very different story.

The vast majority of our losses came in the first week of March (Mar 2-6), when equity exposure was still elevated at 83%. Two days in particular drove the damage: a -5.26% loss on March 3 and a -3.29% loss on March 6. Combined, those two sessions alone account for roughly 8.5 percentage points of drawdown — more than the entire monthly loss — with partial recovery on other days.

After March 13, when the overlay was fully engaged at reduced exposure, the portfolio lost only approximately -1.5% over the following 14 trading days. Over that same period, SPY fell an additional -4.6%. The divergence is visible in the chart below.

The first week was painful. Our portfolio, running higher-beta growth names at high equity exposure, took a larger initial hit than the broad benchmarks initially. This is the honest cost of running 83% equity in a momentum-oriented strategy. But the overlay's job is not to prevent all losses — it is to prevent catastrophic ones. And the second half of March shows exactly that: while SPY continued grinding lower, our portfolio stabilized. For a deeper look at why drawdowns are an unavoidable part of any equity strategy, see Why Drawdowns Are the Price of Long-Term Returns.

How the Three Pillars Responded

Our process is not a single indicator or a gut decision. It is a three-pillar system: Stock Universe, Portfolio Optimizer, and Risk Overlay. Each pillar played a distinct role in March:

1. 1Stock Universe — Our monthly quantitative screening selects US large-cap stocks with the strongest combination of financial quality, earnings consistency, and confirmed price momentum. The March universe was established at the beginning of the month and remained in place. The universe does not change mid-month in response to market moves — it provides the stable pool of quality names from which the portfolio is constructed.
2. 2Portfolio Optimizer — The optimizer builds the best possible portfolio from the qualified universe, targeting maximum risk-adjusted returns with 15-30 equal-weight positions and sector limits. During March, the optimizer had already constructed the portfolio at month start. It does not control cash allocation — that is the role of the Risk Overlay. The optimizer ensures that whatever equity we do hold is optimally diversified.
3. 3Risk Overlay — This is where the active protection happened. The overlay monitors 23 real-time indicators across volatility, credit, momentum, breadth, and sentiment. It signaled the shift to Cruising on March 4 and to Braking on March 23. The overlay does not wait for confirmation from price — it reads the leading indicators and acts. The overlay alone drove the equity reduction from 83% to 18%, which is where the majority of the drawdown protection came from.

The three pillars work in concert. No single indicator triggered the de-risking — it was the aggregate signal across all 23 overlay inputs shifting from constructive to cautionary. This is what we mean by data-driven, not gut-driven. For the full breakdown of last week's positioning, see the Week in Review: Mar 20-28.

Setting Realistic Expectations

If you are evaluating whether to copy this strategy, here is what you should expect:

• During trending markets, the risk score will run at 6-7. This reflects full equity exposure capturing upside. It does not mean the portfolio is reckless — it means the overlay reads conditions as favorable.
• During transitions, the risk score may stay elevated for 7-10 days after the overlay acts, because the risk score is a lagging indicator based on trailing volatility.
• During stress periods, the risk score will drop to 3-4 as the overlay reduces exposure. This is the system working as designed.
• Monthly returns will not always beat the benchmark. Our goal is to beat SPY and QQQ over full market cycles with equal or less maximum drawdown. Some months we will underperform — particularly in the first days of a sell-off before the overlay fully engages.
• The overlay cannot prevent the first hit. It can — and does — prevent the second and third. That is the difference between a -7.9% month and a -20% quarter.

Understanding which metrics actually matter over a full market cycle — Sharpe ratio, maximum drawdown, recovery time — is more important than any single month's return.

Key Takeaway

“The risk score is a thermometer, not a thermostat. It tells you the temperature after the fact. The overlay is the thermostat — it adjusts exposure before conditions become dangerous. March proved the difference: the overlay cut equity exposure from 83% to 18% in three weeks, and the risk score followed from 7 to 3.”

This is institutional discipline applied to a retail platform. Two veterans with 40+ years combined experience, running a systematic process that knows when to accelerate and when to brake. March was a braking month — and the system did exactly what it was built to do.

*Past performance is not an indication of future results. Your capital is at risk. The risk score is calculated by eToro and may change without notice. All performance figures are approximate and based on portfolio tracking data.*

Weekly positioning, performance vs benchmarks, and what's ahead. Every Sunday.