Periods of sharp market movement have a way of turning long-term investors into short-term decision-makers.
A founder who was comfortable holding equities six months ago may suddenly want more cash. An executive with substantial company stock may begin looking at real estate, private credit, or other alternatives. An investor who previously accepted a 10-year horizon may start checking portfolio values every morning.
Volatility can reveal weaknesses in a portfolio, but it’s usually a poor time to invent an entirely new investment strategy.
For business leaders, the better question isn’t whether stocks are suddenly too risky. It’s whether their wealth is exposed to too many versions of the same risk. Diversification can include stocks, bonds, international markets, real assets, private investments, and cash, but simply owning more investments doesn’t automatically create a more resilient portfolio.
The goal is to understand where risk actually comes from, how different holdings may respond under different conditions, and how much liquidity an investor needs before market stress arrives.
Start by Looking Beyond the Investment Account
Business owners and senior executives often have more concentrated financial lives than their brokerage statements suggest.
Suppose an entrepreneur owns a profitable technology company, holds shares in several large technology businesses, and has equity funds heavily weighted toward the same sector. On paper, the investor owns dozens or hundreds of securities. Economically, though, much of that wealth may depend on similar forces: technology spending, growth valuations, interest rates, and investor appetite for higher-growth companies.
The same problem can occur in other industries.
An executive may receive salary, bonuses, restricted stock, and retirement benefits from one company while also holding additional shares of that employer. A real estate business owner may have both business income and personal investments tied closely to property values and credit conditions.
That leads to a useful starting question:
If the economic force that hurts my business also hurts my portfolio, how diversified am I really?
Concentration can come from several sources:
- Employer or founder equity
- A large position in one industry
- Heavy exposure to one country
- Multiple funds owning many of the same companies
- Property holdings concentrated in one market
- Business and investment income tied to the same economic cycle
- A large share of wealth invested in assets that cannot be sold quickly
Recognizing these overlaps can be more useful than simply counting how many funds, properties, or accounts someone owns.
Diversification Comes in Several Forms
A portfolio can be diversified by company, sector, geography, asset class, income source, liquidity profile, and economic driver.
Geographic diversification provides a straightforward example. Vanguard found that a portfolio holding 60% U.S. equities and 40% non-U.S. equities produced an annualized return close to 10% over the 10 years examined in its analysis. Vanguard also generally uses roughly 40% international exposure within the equity portion of its diversified framework.
The point isn’t that 40% international exposure is right for every investor. It’s that diversification can happen within an asset class before an investor ever considers alternatives.
A portfolio might spread exposure among:
- S. and international equities
- Large and smaller companies
- Growth- and value-oriented businesses
- Government and corporate bonds
- Short- and longer-duration fixed income
- Public and private markets
- Real estate and infrastructure
- Cash and cash equivalents
Each serves a different purpose, and each brings different risks.
Correlation Matters More Than the Number of Holdings
Owning several assets provides limited protection if they tend to rise and fall for similar reasons.
Correlation describes how closely investments move together. Two assets with lower correlations may respond differently to the same economic event, which can reduce the degree to which one source of risk dominates a portfolio.
Those relationships aren’t permanent, though. Assets that behave differently during normal markets can sometimes fall together when investors rush toward liquidity.
That is why diversification should be viewed as a design problem rather than a collection exercise.
A business leader might ask:
- Which investments rely heavily on economic growth?
- Which are sensitive to inflation?
- Which suffer when interest rates rise?
- Which could benefit from falling rates?
- Which depend on easy access to credit?
- Which may provide income even if public equity prices decline?
The answers won’t predict exactly what happens during the next downturn. They can, however, show whether the portfolio has several independent sources of risk or one large underlying bet disguised as many investments.
Don’t Dismiss Bonds Because One Market Cycle Was Difficult
The stock-bond relationship has received plenty of attention in recent years, particularly after periods when inflation and rising rates hurt both markets.
That doesn’t mean fixed income has lost its diversification role.
During a period of equity weakness in early 2025, Vanguard reported that the broad U.S. aggregate bond market gained about 1.3% while the S&P 500 had fallen approximately 8.8% through April 11. That represented a performance difference of roughly 10 percentage points.
The example illustrates why judging an asset class entirely by its worst recent period can lead investors astray.
Bonds can provide income and may respond differently from equities during certain economic slowdowns. They also carry their own risks, including interest-rate and credit risk.
The question shouldn’t be, “Do bonds always protect stocks?”
Nothing does.
A better question is, “What role does fixed income play in this particular portfolio, given the investor’s goals, liabilities, and time horizon?”
Alternatives Can Add New Sources of Return, but They Change the Tradeoffs
Wealthy families and institutional investors frequently look beyond public stocks and bonds when constructing diversified portfolios.
Those figures don’t mean individual accredited investors should copy family-office allocations. Family offices may have different tax circumstances, staff, access, investment horizons, risk limits, and liquidity reserves.
They do show why sophisticated investors often evaluate diversification beyond publicly traded securities.
Real Assets
Real estate, infrastructure, commodities, and other tangible assets may react differently to inflation, interest rates, economic growth, and market sentiment.
Accredited investors considering real estate during market volatility may be attracted to the potential for income, tangible underlying assets, and return drivers that differ from daily stock-market pricing.
But real estate isn’t automatically defensive.
Diversification benefits have to be evaluated alongside those risks.
Private Markets
Private equity, private credit, venture capital, and privately held real estate can introduce exposures unavailable through conventional public markets.
They can also introduce complexity.
Private investments frequently involve:
- Multi-year holding periods
- Limited redemption opportunities
- Less frequent valuation
- Higher fees
- Manager-selection risk
- More complicated tax reporting
- Less publicly available information
Illiquidity can sometimes benefit investors by discouraging emotional selling, but that doesn’t make it harmless. An investor who needs cash at the wrong time may have little ability to sell a private holding at an attractive price.
Liquidity Is Part of Diversification
Liquidity deserves its own place in portfolio construction because business leaders often have unpredictable capital needs.
A founder may need money for an acquisition. An executive might exercise stock options. A family could face a large tax payment, property purchase, or other major expense.
An investor with a $10 million portfolio isn’t necessarily financially flexible if $8 million is locked in a business, property, and private funds.
For that reason, investors can think in liquidity layers.
The allocation should reflect when the investor may need the money, not simply which investments appear attractive today.
Rebalancing Can Turn Volatility Into a Process
A diversified portfolio naturally drifts.
If equities rise far faster than other assets, stocks may eventually represent much more of the portfolio than originally intended. If they then fall sharply, the investor may discover that actual risk was much higher than planned.
Rebalancing brings allocations back toward predetermined targets.
The process forces investors to make decisions according to portfolio policy rather than emotion. That may involve trimming an asset that has appreciated heavily and adding to one that has lagged.
The benefits become easier to appreciate during large market moves.
Morningstar’s broadly diversified test portfolio returned 18.3% in 2025, compared with 13.3% for a traditional U.S. 60% stock/40% bond portfolio, a difference of about five percentage points.
That doesn’t establish that wider diversification will outperform every year. In some periods, concentrated U.S. equities may do substantially better.
Diversification deliberately accepts that possibility. Its purpose is to avoid making an investor’s financial future depend too heavily on one outcome.
Beware of Turning Volatility Into a Market-Timing Strategy
The instinct to “get out until things calm down” sounds reasonable. The problem is deciding when to return.
Market rebounds often begin while economic headlines still look unpleasant.
Vanguard examined monthly market data from January 1980 through December 2024 using an illustration in which an investor abandoned a 60% stock/40% bond portfolio for cash whenever equities lost more than 10% within three months. Its analysis showed how reacting to declines could leave investors behind the market.
Selling requires one successful timing decision.
Getting back in requires another.
For investors with multi-decade horizons, portfolio structure and disciplined rebalancing may be more controllable than predicting short-term price movements.
Questions to Discuss With an Adviser
A productive conversation about diversification doesn’t have to start with specific funds or products. It can begin with the investor’s entire financial position.
Questions worth discussing include:
- What percentage of my assets can genuinely remain invested for a decade?
- How would my portfolio respond to inflation, recession, higher rates, or falling equity markets?
- Do private investments improve diversification enough to justify their illiquidity and fees?
- How often should allocations be reviewed or rebalanced?
- What would cause us to change the strategy?
- Which decisions have already been made so we aren’t improvising during the next selloff?
The last question may be the most useful.
Diversification Works Best When It Comes Before the Volatility
Market volatility doesn’t automatically call for a major portfolio overhaul. Sometimes it simply exposes risks that were present all along.
That is one of diversification’s most practical advantages: not eliminating volatility, but reducing the temptation to redesign an investment strategy in the middle of it.
