SUMMARY
Into every investor’s life, a little rain must fall – and typically more than a little. We explore what may potentially make portfolios more resilient.
KEY TAKEAWAYS:
Volatility and drawdowns are a fact of life with risk assets
Investors need to understand the risks they may face
Concentration can make portfolios more vulnerable to market turmoil
Diversification, higher quality and uncorrelated assets may improve resilience
When allocations get blown off course, it is important to revisit them
It is a bittersweet irony. Some of the world’s nicest places to live are also vulnerable to extreme weather and natural disasters.
Their inhabitants thus accept a tradeoff. They endure occasional harsh conditions in return for an otherwise rewarding lifestyle.
However, this doesn’t mean that such residents leave everything to chance. Instead, they typically scrutinize the risks, build and remodel wisely, take out adequate insurance and batten down the hatches when threats loom.
Similar principles apply when investing. Risk asset classes – such as equities, credit and private investments – have helped preserve and grow wealth over time. Now and again, though, they have suffered the equivalent of nature’s wrath.
The market turmoil of April 2025 was merely the latest example. Global equities shed 10.1% in the first week of the month alone. They then rebounded 7.8% in the next.1
Faced with volatility and other risks, investors might adopt an approach like that of prudent homeowners.
Understanding, preparedness and vigilance can all help improve portfolio resilience.
What risks might you face?
Dwelling on the potential for adverse outcomes is never pleasant, be it loss of a roof or depletion of capital. Instead, there may be a temptation to hope that the worst never happens. Nevertheless, contemplating negative scenarios is vital.
For investors, this includes exploring past market turmoil and its impact on diversified portfolios.
Indeed, establishing how deep a peak-to-trough decline in portfolio value you might be willing to stomach is key to creating your long-term investment plan.
Equally important is understanding past market recoveries. Investors have often made the mistake of selling up at dire moments, often not long before a bounce-back.
In our experience, those whose long-term plans reflect a solid understanding of risks have typically been less likely to make costly mistakes around episodes of market stress.
How vulnerable is your portfolio?
As well as understanding various risks, you need to assess your portfolio’s likely resilience. This is analogous to examining the durability of walls, roofing and drainage.
Many portfolios have outsized allocations to certain asset classes, countries, sectors, currencies or securities. While these may prove rewarding for a while, this can change rapidly in a crisis.
A thorough analysis of your current portfolio construction can help you identify many vulnerabilities.
Is your portfolio diversified?
A broadly diversified investment portfolio is like a well-designed and sturdily built house. It may better endure harsh conditions than the typical undiversified portfolio.
Holding a suitable mix of different asset classes from around the world can potentially mitigate portfolio volatility and drawdowns.
Between 2000 and 2024, there were only three cases where global equities and bonds fell simultaneously over a calendar year.
Bonds mostly rose in years where equities declined, thus enhancing portfolio resilience.
Figure 1. Rare simultaneous down-years for equities and bonds
Source: Citi Wealth Investment Lab, Bloomberg. Annual data Jan 1, 2000 to Dec 21, 2024. Global Equities are represented by the MSCI World Net Total Return USD Index, Global Bonds by the Bloomberg Global-Aggregate Total Return Index Value Unhedged USD.
Past performance is no guarantee of future results. Real results may vary. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance
In addition to diversifying across asset classes, it is worth diversifying within them. This may mean investing across different countries or regions.
It may also involve exposure to sectors with greater and lesser sensitivity to economic cycles.
Carefully combining multiple sources of risk and return can potentially help a portfolio to endure adverse market conditions.
That said, it is important to note that diversification does not guarantee a profit or protect against loss.
What to do when harsh conditions beckon?
When the skies blacken, some investors have taken additional defensive measures. One way of battening down the hatches is by raising quality. This refers to the equities of firms with more robust balance sheets, consistent earnings growth and reliable dividend growth.
Over the past three decades, higher quality equities have beaten equities of lower performing companies more broadly. And they have done so before and during recessions – figure 2.
Figure 2. Quality equities’ outperformance in recessions and over time
Source: Citi Wealth Investment Lab, Bloomberg. Monthly data 1 Dec 1998 to 31 Mar 2025. Global Equities: MSCI World Net Total Return Index; Global Quality Equities: MSCI World Sector Neutral Quality Net Total Return Index.
Past performance is no guarantee of future results. Real results may vary. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Likewise, bonds from the most creditworthy issuers may assist in mitigating the effects of volatility.
For suitable and qualified investors, a further possibility may be assets with low correlations to equities and fixed income.
Gold-related equity investments, real estate and infrastructure, and certain hedge fund strategies may fit into this category. Over time, such assets have often risen or maintained their value during wider market turbulence.
Also for suitable and qualified investors, there are hedging strategies that can be implemented based on your portfolio allocation. They can be customized to manage your portfolio exposure to market volatility.
In all cases, such investments have risks of their own. Just as they may do better in troubled times, for example, they may do less well under more normal circumstances.
What to do in the aftermath of turbulence?
Following market turmoil – such as a bear market – even well diversified portfolios will have been affected.
For example, if bonds have gained in value while equities have sold off sharply, the weightings of each may have strayed far from the targets set out in the long-term investment plan.
To remain aligned with your risk and return goals over time, rebalancing may be required. This can help you position more appropriately for a recovery, for example.
The bottom line: Seek portfolio resilience
Staying fully invested throughout market turmoil is central to our approach to investing. Failing to do so potentially risks crystallizing losses and missing recoveries.
Importantly, though, staying invested doesn’t equal doing nothing. Instead, checking in on portfolio resilience is prudent before difficulties strike.
Thorough preparation can assist with weathering storms and pursuing opportunities when brighter times return.
