Is Your Portfolio Resilient Enough? Experts Weigh In on How To Check

How To Perform a Portfolio Stress Test

Stress testing means simulating how your investments would perform in extreme scenarios—such as a 2008-style crash or an interest-rate spike.​ It’s a bit like asking the big bad wolf to do his worst, and seeing how your little house holds up. 

There are several types of stress testing, which may involve using historical or hypothetical scenarios, adjusting individual variables to assess their impact, or working backward from a negative outcome (such as a sudden 20% drop) to understand root causes and potential blind spots. Here’s the basic process: 

1. Work with a financial advisor to build a detailed model that factors in all your investments (everything from stocks and bonds to real estate and crypto). 
2. Use software to run different situations (including worst-case scenarios like a severe market crash or sudden loss of income), showing where you’d be hit hardest, and how quickly the portfolio might recover.​
3. Your financial advisor will analyze the reports against your financial goals, risk tolerance, and investment time horizon to reveal areas where you may need to make adjustments. 

 This process reveals hidden risks, such as overexposure to certain sectors or tax inefficiencies, allowing you to strengthen your portfolio now and invest with confidence before a real crisis arises.

Common Vulnerabilities To Watch For

Over-Concentration in U.S. Tech and Equities

Experts from Bridgewater Associates warn U.S. investors not to load up too heavily on domestic stocks, particularly technology. This concentration leaves you vulnerable to systemic risk—if one market or sector stumbles, your entire portfolio is affected. You need diversification beyond your home market and favorite sectors to reduce illiquidity risk and protect against concentrated losses.

Chartered Financial Analyst (CFA) Doug Carey agrees, false diversification is all too common. “One problem is that the S&P 500 is dominated by tech now. About 33% of the S&P 500 is in technology, and just five companies (NVIDIA, Apple, Microsoft, Amazon, and Google) make up 28%.” He continued, “This means that investors who think they might be diversified enough actually aren’t.”

Ignoring Inflation or Interest-Rate Risk

The International Monetary Fund (IMF) has examined the performance of bond mutual funds and fixed-income portfolios under rising interest rates and inflation. Their findings are clear: if you fail to manage this risk, you face significant drawdowns and potential liquidity problems. Interest-rate sensitivity matters, especially when inflation is sticky.

Understanding How to Manage Risk

According to a FINRA survey, 80 percent of consumers have at least a basic understanding of investment risk, but only 55 percent can recognize risk-mitigation strategies. This means that while most respondents have a basic knowledge of investment risk, they are much less aware of how to manage it.

How To Build More Resilience Into Your Portfolio

Diversify Across Asset Classes

Diversification is the bedrock of portfolio resilience. You’ve no doubt heard about spreading your investments across bonds and cash to manage risk. 

Traditionally, bonds acted as a safety net when stocks fell. However, the market turmoil of 2022—when stocks and bonds dropped simultaneously due to inflation and rising rates—proved this safety net isn’t guaranteed. To build true resilience, you need to diversify within asset classes, not just across them.

• Equities: Mix U.S. and international stocks, as well as large- and small-cap companies.
• Fixed Income: Vary your holdings by credit quality (investment-grade vs. high-yield) and duration (short- vs. long-term).
• Alternatives: Consider adding assets like real estate or commodities that often behave differently from traditional markets.

Strategic asset allocation means that if one correlation breaks down, your portfolio has other pillars of support to absorb the shock.

Use Funds With Defensive Strategies

Defensive funds focus on stable sectors, like utilities and health care, that tend to hold up better when markets decline.

A few types of defensive funds: 

• Consumer staples funds: These focus on companies producing essential goods, like food, beverages, and household products. Examples of consumer staple funds would be Fidelity MSCI Consumer Staples Index ETF (FSTA) and Vanguard Consumer Staples ETF.
• Low-volatility equity ETFs: These funds favor companies with historically stable stock prices, so they can deliver “market-like returns” with less risk. Examples are iShares USMV or EEMV. 
• Utilities sector ETFs: By focusing on basic services that society relies on, utilities sector ETFs remain relatively stable through market downturns. Examples are Harvest ETFs HUTL and HUTE.

Rebalance Regularly and Plan for Volatility

Set a rebalancing schedule now—most investment professionals recommend reviewing your portfolio every six to 12 months, or whenever your allocation drifts five percentage points off target. For example, if your target is 60% stocks and 40% bonds, but stocks surge to 70%, sell some stocks and buy bonds to restore your 60/40 balance.

When you rebalance, think strategically. Shift away from overvalued sectors into undervalued areas, including international markets that may offer better prospects. Use market downturns as buying opportunities—pick up quality assets at lower prices and put the “buy low, sell high” principle into action. If you’re taking required minimum distributions, coordinate them with your rebalancing to maintain your target allocation while minimizing taxes.

Don’t forget to check if your financial goals have shifted. Has your retirement timeline changed? Your income, savings rate, or family situation? Make sure your investment plan still reflects where you’re headed.

Finally, create a written volatility action plan for yourself. Decide now (not when the next downturn hits): Will you hold steady? Shift 10% to safer assets? Increase contributions to buy at lower prices? Writing this down removes emotion from future decisions and helps you avoid panic-selling when markets get rocky.

The Bottom Line

Building a resilient portfolio is less about predicting the future and more about preparing for it. By diversifying deeply across and within asset classes, regularly rebalancing to lock in gains, and stress-testing your strategy against worst-case scenarios, you’ll build a strong financial foundation. This approach protects your capital from severe downturns and minimizes the impulse to panic-sell, allowing you to stay on track toward your long-term goals.