The Right Portfolio Is One You Can Stay Invested In
Investors are frequently advised to “stay invested” when markets become volatile. There are good reasons for this: selling during a downturn can lock in losses, and an investor who leaves the market must then decide when to reinvest.
But staying invested is not simply a matter of willpower. It becomes much more difficult when a portfolio is taking more risk than the investor can reasonably tolerate—or when the money is likely to be needed before the market has time to recover.
The ability to remain invested during difficult periods therefore begins before the downturn arrives. It begins with building the right portfolio.
Risk Looks Different When Markets Fall
An investor may be comfortable describing themselves as growth-oriented when markets are rising. The real test comes when account values decline.
Risk tolerance is partly about numbers: how much could the portfolio reasonably fall during a difficult market? It is also emotional. How would the investor react after opening a statement and seeing a significantly lower balance?
This emotional response matters. A portfolio that looks suitable on paper may still be inappropriate if its normal fluctuations cause so much distress that the investor is likely to abandon it during the next downturn.
At the same time, risk tolerance should not be confused with the ability to take risk. An investor may feel comfortable with market fluctuations but still need the money within a relatively short period. Conversely, someone with a long investment horizon may have the financial ability to accept considerable volatility while remaining personally uncomfortable with it.
An appropriate risk profile needs to consider both.
Begin With the Purpose of the Money
There is no single allocation that is right for every investor. A portfolio should reflect factors such as:
The investor’s financial goals
When the money is likely to be needed
Income and liquidity requirements
The ability to withstand a decline
The emotional tolerance for fluctuating values
The investor’s wider financial circumstances
Someone investing for retirement several decades away will not necessarily need the same allocation as someone who expects to use the funds to purchase a home within the next few years.
The objective is not to eliminate risk. All investments carry some form of risk, including the risk that overly conservative investments may not keep pace with inflation or provide sufficient long-term growth. The goal is to take an amount and type of risk that are appropriate for the investor’s circumstances.
The Role of Asset Allocation
Asset allocation refers to how a portfolio is divided among different types of investments, such as equities, fixed income and cash.
Equities may offer greater potential for long-term growth, but they can experience significant short-term declines. Fixed-income investments can serve a different role, potentially providing income, greater stability or funds that may be needed sooner. They also carry risks of their own, including interest-rate, inflation and credit risk.
The balance between these asset classes should be intentional. A portfolio should not become aggressive simply because markets have recently performed well, nor should it become overly conservative solely because markets have recently declined.
A suitable allocation is designed around the investor—not around the latest market forecast.
Diversification Is More Than Owning Many Investments
Diversification spreads investments among different companies, sectors, asset classes and, where appropriate, geographic markets.
It cannot guarantee a profit or prevent a portfolio from falling. During a broad market sell-off, many investments may decline at the same time. However, diversification can reduce the portfolio’s dependence on the success of a single company, industry or type of investment.
Owning many different securities does not necessarily mean a portfolio is properly diversified. Several investments may hold many of the same companies or respond similarly to the same economic conditions. The more useful question is not simply, “How many investments do I own?” It is, “What role does each investment play, and how do these investments work together?”
Review Rather Than React
A market downturn can be a useful time to review a portfolio. The purpose of the review is not automatically to make changes, but to determine whether anything material has changed.
Investors may wish to ask:
Are my goals and investment timeline still the same?
Will I need this money sooner than expected?
Does the portfolio still match my risk profile?
Is it adequately diversified?
Has market movement pushed the allocation away from its intended targets?
Has my wider financial situation changed?
If the answers show that the original investment plan remains appropriate, the review may reinforce the decision to stay the course. If the investor’s circumstances have genuinely changed, an adjustment may be reasonable.
This is different from changing a portfolio simply because recent market movements have created fear.
A Portfolio That Works in the Real World
The portfolio with the highest potential return is not necessarily the most suitable portfolio. Higher potential returns generally involve accepting greater uncertainty and larger fluctuations along the way.
A well-constructed portfolio must work not only in a projection, but also in the real world—when markets decline, headlines are alarming and the investor is tempted to abandon the plan.
There is no allocation that can make volatility disappear. However, a portfolio that reflects the investor’s goals, time horizon, liquidity needs and genuine tolerance for risk can make periods of uncertainty more manageable.
In the companion article, Staying on the Ride: Investing Through Market Volatility, I discuss why moving out of the market during a downturn can create the additional challenge of deciding when to reinvest. That is why choosing the right portfolio from the outset matters so much: the aim is to build an allocation that the investor has a realistic chance of holding through an entire market cycle—not only when the ride is smooth.
Disclaimer: This article is intended for general educational and informational purposes only and does not constitute individualized investment, legal, or tax advice. Individual circumstances vary, and investors should consult appropriately qualified professionals before making financial decisions. We do not give legal or tax advice. Always consult a tax or legal adviser to review your individual situation.
The information contained in this article reflects the opinions of the author and not necessarily those of Portfolio Resources Group, Inc. or its affiliates.
Rachel Weiss is a licensed investment professional in both the United States and Israel, with over 17 years of experience in the financial services industry. She works with clients to establish and manage U.S. investment accounts, helping them build investment portfolios aligned with their individual financial goals, circumstances, and risk tolerance.
Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI.
For more information, visit www.weissinvest.com or email rweiss@prginc.net.
Sources and Further Reading
Financial Industry Regulatory Authority (FINRA). “Know Your Risk Tolerance.” October 9, 2024- Click here for article.
U.S. Securities and Exchange Commission (SEC), Investor.gov. “Asset Allocation and Diversification.”- Click here for article.
U.S. Securities and Exchange Commission (SEC), Investor.gov. “Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing.”- Click here for article.
Fidelity Investments. “Rethinking Risk.” Fidelity Viewpoints, July 27, 2026- Click here for article.
