The Strategic Investor’s Guide to Building a Resilient Portfolio

You’ve mastered the basics of investing, like stocks, bonds, and retirement accounts. Now, you’re ready to take your investment strategy to the next level and build a portfolio that can weather whatever the market brings.

Discover powerful ways to enhance your resilience, including asset diversification, tax optimization, and ETF investing.

Why Portfolio Resistance Matters

If history has proven anything about investing, it’s that volatility is a given when holding stocks. The market as a whole has long delivered strong returns on average, but year-to-year swings can be wildly unpredictable.

That uncertainty can be nerve-wracking, especially during extended downturns, but volatility is perfectly normal. The real danger is that it will cause you to deviate from your investment strategy, lock in your losses, and miss out on a potential recovery.

Building a more resilient portfolio is one of the best ways to help prevent that outcome. By limiting losses in a downturn, you not only protect your gains—which can improve long-term returns—but also avoid the stress that could lead to emotional decisions.

“Being a resilient investor is all about staying invested during market downturns,” said Daniel Shomper, CFP, senior associate wealth manager at Fairway Wealth Management.

“This gives investments time to recover, avoiding realized losses. More importantly, it eliminates the need for timing the reinvestment. Investors who sell in a panic often wait for the ‘right’ time to get back in and miss the subsequent rebound, which can weigh down long-term returns.”

Exploring Your Asset Options

Stocks often make up the bulk of investment portfolios in the United States. According to the latest Gallup data, 62% of Americans own stocks, whether individually or through some sort of fund.

But while stocks can be powerful growth drivers, a 100% stock portfolio is unlikely to be the most resilient. If you want to mitigate the effects of market volatility, diversifying into other asset classes is often essential.

“Investors should think about expanding beyond stocks as soon as their portfolio reaches a level where preserving capital becomes as important as growing it,” said Jimmy Doogan, CFA, portfolio manager at Crestwood Advisors.

“Early in wealth building, being stock-heavy makes sense because the investor’s biggest asset is time. But as wealth continues to grow, or when income needs and specific goals emerge—like purchasing a home—diversification becomes critical.”

Here are some popular asset classes that can supplement stocks in a portfolio:

• Bonds: Provide stability and a predictable income stream. Often move differently from stocks, which can smooth out overall portfolio performance in downturns.
• Real estate: Offers the potential for cash flow and capital appreciation. Leverage and industry expertise may allow you to achieve outsized returns.
• Alternatives: Refers to asset classes like private credit and private equity. Can provide exposure to unique opportunities not tied to public markets, though they may come with higher risk.

“Having an allocation to multiple asset classes reduces the likelihood of needing to sell an investment at a loss when cash is needed,” said Shomper. “It also helps stave off panic when a particular asset class, segment, or individual security takes a large downturn, since the rest of the portfolio acts as a buoy to stabilize overall returns.”

Using ETFs as Building Blocks

Exchange-traded funds (ETFs) are a type of investment fund that holds multiple underlying assets, such as stocks, bonds, or commodities. They can provide broad diversification within a single investment, often for a very low expense ratio. As a result, they frequently make useful tools when building a resilient portfolio.

ETFs are similar to mutual funds, but you can trade ETFs on an exchange throughout the day, like individual stocks. Historically, ETFs have also tended to offer lower fees, lower minimum investment thresholds, and greater tax efficiency. However, their traits can differ significantly between types.

Here are some of the most notable ETF variations:

• Passive ETFs: These automatically follow a predetermined set of investing rules, requiring little to no active management.
• Actively managed ETFs: Active ETFs are run by professionals who buy and sell holdings, trying to outperform benchmarks.
• Index ETFs: These are passive ETFs designed to track a specific market index, such as the S&P 500.
• Sector ETFs: Also known as industry ETFs, these passive funds invest in stocks within a specific economic sector, like technology or health care.
• Dividend ETFs: These invest in stocks with a history of paying regular, often increasing, dividends to shareholders.

“Using index ETFs for the core of a portfolio can help investors stay the course,” said Shomper. “Since they provide exposure to a clearly defined market segment, investors know what to expect from them in different market environments.”

Sharpening Your Strategy

Investment strategy isn’t something you set and forget, no matter how confident you are in it. Over time, your personal and financial circumstances inevitably change. To keep your portfolio resilient, it’s important to review your plan at least once a year and after major life events, like marriage or having a child.

Often, you’ll only need to make minor tweaks, such as rebalancing to maintain your asset allocation. But sometimes, you may need to make more significant updates, such as rethinking your choice of investment vehicle. For example, you might change from a mutual fund to an ETF if you can find an equivalent fund with a lower expense ratio.

However, if you feel confident in your core investing strategy, you may want to experiment with more advanced, higher-risk tactics using a small percentage of your portfolio.

In that case, derivatives may be worth investigating, such as options, futures, and swaps. These are financial contracts between two or more parties that derive their value from an underlying asset or group of assets.

“Derivatives can dramatically amplify both upside and downside potential, while also shifting the likelihood of each,” said Sean Sun, managing partner at Maridea Wealth Management. “Imagine a game where a coin flip has a 50-50 chance of losing 100% on tails but gaining 1,000% on heads. You’d want to play that game until the end of time.”

However, while derivatives offer new opportunities, they also come with complex risks. Be careful not to let them undermine the resilience you’re trying to build. “Derivatives can be powerful tools, but wielding them effectively requires deep knowledge and disciplined execution,” said Sun.

Making Tax-Savvy Moves

Following an efficient tax strategy is another key part of building a resilient portfolio, and the foundation of tax efficiency is asset location. This refers to the account you place an investment in, such as a 401(k), individual retirement account (IRA), or taxable brokerage account.

The order in which you fund these accounts—and how much you contribute to each one—has a significant impact on the amount of taxes you pay over your lifetime.

“For order of contributions, I typically recommend prioritizing the 401(k) and HSA,” said Evan Luongo, CFP, founder of NoDa Wealth. “With the 401(k), at a minimum, you should contribute enough to capture the full employer match. The HSA is powerful because of its triple tax benefit. After that, the next step depends on goals.”

As your portfolio grows more complex, you can also consider more active strategies. One of the most popular is tax-loss harvesting, which involves selling investments at a loss to offset gains or ordinary income. You typically reinvest the funds in a similar—but not identical—asset to maintain your target exposure without triggering a wash sale.

“We usually introduce tax-loss harvesting once a client has built a taxable account large enough that realized losses could offset meaningful gains or ordinary income,” said Doogan. “The right time is often during significant market volatility, when losses may be most visible.”

Staying Strategic, Not Reactive

As important as portfolio resilience is, it isn’t sufficient on its own. No portfolio is immune to volatility, so you also have to cultivate a long-term mindset. Understand that ups and downs are part of the process and stay committed to investing through them.

“Market swings are the cost of admission for investors who want to capture long-term growth,” said Luongo. “It never feels comfortable, but decades of data show two things: (1) volatility is normal, and (2) markets recover, and usually to higher levels than before.”

Emotional reactions can undermine even the best investment strategy. Stay patient, avoid the temptation to chase trends, and adjust your strategy only when there’s a logical reason to do so. If you have trouble maintaining perspective, consider working with a financial advisor. 

“I’m a nervous flyer, so whenever I hit turbulence, I like to watch videos of airplane wings being stress-tested—bent nearly vertical before they finally fail,” said Sun. “It reminds me just how resilient this flying hunk of metal really is.”

“I think of market volatility the same way. Anytime we see red in our portfolios, we ask ourselves, have the fundamentals changed? Has the underlying thesis changed? If not, then the wings still hold and we stay buckled in.”

The Bottom Line

Building a resilient portfolio is about limiting losses in a downturn to improve returns and reduce stress. You can accomplish this with tactics like diversifying across asset classes, leveraging ETFs, avoiding taxes, and re-evaluating regularly. Combined with a long-term investing mindset, you’ll be well-equipped to weather market cycles.