Portfolio Resilience
Ways to strengthen a portfolio—especially for unpredictable markets
In uncertain times, building a resilient core is essential
Nancy Rooney, Managing Director, Global Head of Portfolio Advisory Group
Serena DiBianco, Associate, J.P. Morgan Private Bank, Portfolio Advisory Group
Published Mar 28, 2025
The news cycle has sped up, and stresses are rising. Stubborn inflation, escalating geopolitical tensions, policy uncertainty, disruptive technology: Any one of these could—and have—sparked market volatility, as recent weeks have shown.
These times call for a master plan to help an investor’s core portfolios weather the unpredictability. Core portfolios are the backbone of a financial plan. Holding stocks, bonds and diversified alternatives, where possible, is designed to withstand market fluctuations and support your lifestyle over the long term.
We are optimistic about stock market returns in 2025. Yet after two stellar years of stock market returns, many investors have drifted from their original portfolio balances. We think it’s the right moment for a renewed focus on portfolio resilience to help investors stay on track to achieving their financial goals through challenging times.
Here are our top ideas for fostering resilience, designed both to help preserve wealth and manage volatility in core portfolios.
1
Regular stress testing
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What if the world experiences another global financial crisis? What if the 10-year U.S. Treasury declines precipitously? What if the so-called “Magnificent 7” tech stocks plunge over 20%? (Recent volatility has rattled some tech investors.)
Extreme events don’t usually occur—but what if they do? We believe robust stress testing is a critical tool to portfolio construction and building resiliency. It helps investors make prudent trade-offs or strengthen vulnerable areas of their portfolios if testing shows that their goals might not be met under certain scenarios.
Portfolio stress testing ensures portfolios can adapt to various conditions without breaking, demonstrating how long-term plans could be impacted across different market situations. Investors should consider how much of a swing in value their current equity exposures would experience in a downturn, and whether that can be tolerated. Is the portfolio aligned with long-term wealth goals, or has it drifted? What risks are being taken, and where in the portfolio? How are risks sized, and has that been done intentionally?
There’s much to be gained from regularly doing this kind of proactive portfolio management. And last year’s gains give investors the opportunity to strategically reassess from a position of strength (if somewhat less so after a rocky first quarter).
2
Diversification
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Markets often respond to uncertainty with volatility. Given today’s troubling and ongoing geopolitical tensions and policy uncertainty, investors want to be sure their portfolios are well diversified and have allocations that will respond differently.
Start with stock-bond diversification—a resilience fundamental that spreads risk because different asset classes tend to react to events differently, typically reducing portfolio volatility. But diversification goes one better, asking: Is there diversification within the stocks and bonds?
Is there international equity exposure, for example? What about dividend-paying equities? Different return drivers, across asset types and regions, can help manage volatility and potentially help in preserving capital.
Bonds can enhance portfolio resilience by generating income and potentially mitigating the impact of economic weakness, and there are many different types. Core fixed income includes investment grade corporate debt, as well as government bonds and municipals, for tax-sensitive clients. Each one offers relatively high yields these days, along with low downgrade risk. High yield bonds can also provide attractive income, but the risk associated with them should be balanced against equity exposure.
Investors are increasingly turning toward hedge funds and private investments for opportunities not available in public markets and to further diversify their portfolios. Today’s environment presents opportunities for hedge fund investments due to higher levels of equity dispersion, lower expected stock correlations and greater stock-specific risk, which have historically provided conditions that some managers have leveraged to achieve strong performance.
The current rate environment may present opportunities. While most analysts anticipate rates will ease, relatively high rates are still expected, which could create conditions that some hedge funds might find advantageous for pursuing absolute and relative returns.
Hedge fund returns have historically improved when interest rates are high
Hedge fund index 5-year annualized returns above cash rates
Source: Bloomberg Finance L.P. Data as of January 31, 2025. Hedge fund 5-year annualized excess returns over cash rates. Past performance is not indicative of future results. It is not possible to invest directly in an index.
Investors might explore private, illiquid investments: direct lending, infrastructure, real estate and asset-backed finance. These offer income and the potential to move in a different direction—uncorrelated—from stocks and bonds.
Keep in mind, private investments generally require longer investment horizons, which may align well with long-term growth strategies. In other words, they offer the potential to participate in the growth of potential innovative companies and sectors. But they’re not often readily liquid.
3
Discipline—about staying fully invested
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In order to maintain a core portfolio’s value, staying fully invested ensures participation in market recoveries and growth, which could impact overall returns. Missing the market’s best days has meant a surprisingly big hit: Just missing out on the S&P 500’s 10 best days over the past 20 years meant a 10.6% loss compared to staying fully invested.
Missing even a few big days in the stock market historically meant large losses vs. staying fully invested
It’s about time in the market, not timing the market
Source: J.P. Morgan Asset Management analysis using data from Morningstar Direct. Data as of February 28, 2025. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large-capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. It is not possible to invest directly in an index. An individual cannot invest directly in an index. Analysis is based on the J.P. Morgan Asset Management Guide to Retirement.
Discipline may not be easy. If the market sells off dramatically, that may well be the time when investors need to buy, even though it might feel uncomfortable. One challenge is simply that human nature has a fear reflex, leading people to sell at the worst times. That’s when discipline comes in. Similarly in a surging upmarket, a disciplined approach may mean prudently taking some gains.
A portfolio that is holding an excess of cash is most likely not in the strongest position to get where you want to go, and that is particularly relevant in today’s inflationary environment, which erodes cash’s value. Staying in cash too long, or too often, could mean being forced to take on more risk later, or having to lower wealth goals.
To incorporate these powerful elements of resiliency into your financial life to bolster your portfolio for the long term, talk to your J.P. Morgan team about reviewing and stress testing your core portfolio, and about enjoying the full opportunity set of investments available to you.
4
Rebalancing
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Portfolios that were diversified a year ago may no longer be, raising the question of current diversification. As the chart shows, a 60/40 stock-bond portfolio, left alone since 2014, has drifted to more like a 76/24 mix today.
Portfolios may have been diversified 10 years ago, but they’re probably not today
Regular portfolio reviews are essential to maintain alignment of investment strategies with objectives
Source: Bloomberg. Based on a 60% allocation to the MSCI World Net Total Return USD Index and a 40% Allocation to the Bloomberg Muni 1–15 Year Bend (1–17) Total Return Index between December 31, 2014, through December 31, 2024. Past performance is not indicative of future results. It is not possible to invest directly in an index.
What it doesn’t show: the consequences, which could be alarming. In a downturn, a tilted portfolio’s losses would potentially be greatly magnified.
Between 2014 and 2024, the MSCI World experienced an average maximum drawdown of 13%. If a portfolio remained untouched and was sitting at that 76/24 allocation, it had the potential of losing 33% more on the equity portion versus if it had maintained the original 60/40 portfolio. On top of that, the tech exposure would have increased more than 200% (233%) over that same time period, unintentionally boosting the growth-related investments. We regularly review portfolios for rebalancing potential so that the overall asset allocation continues to match risk tolerances and keeps investors on track toward their goals.
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