By Stacy Francis, President and CEO, Francis Financial Inc.
Ensuring your investments are resilient to market volatility and life’s uncertainties is paramount. Here’s a checklist to help you evaluate your portfolio’s strength.
In life and investing, the unexpected is inevitable. From sudden market downturns to personal emergencies, unforeseen events can threaten financial stability if you’re unprepared. Stress-testing your portfolio helps you identify vulnerabilities and make adjustments before trouble arises. Here are five essential questions to assess whether your investments can endure market fluctuations while keeping you on track to achieve your financial goals.
1. Is Your Portfolio Built to Withstand Market Storms? Diversification and Volatility Explained
Diversification is your first line of defense against market volatility. When your investments are spread across various asset classes, sectors, and geographic regions, it reduces the impact of poor performance in one area. In fact, research from a landmark study by Brinson, Hood, and Beebower found that 93.6% of a portfolio’s volatility is determined by its asset allocation, highlighting its crucial role in managing risk.
Asset allocation refers to the strategy of dividing your investments among different asset categories, such as different types of stocks and bonds, based on your risk tolerance, time horizon, and financial goals. Volatility, which measures how much the price of an asset fluctuates, is a key factor in risk assessment. Stocks, for example, tend to be more volatile than CDs or short-term government bonds, meaning their prices can experience significant swings in a short period.
While some levels of volatility are normal, excessive market fluctuations can be damaging, especially for investors who react emotionally. Many investors make the mistake of buying high and selling low, which is the opposite of a successful investment strategy. Ideally, investors should aim to buy low and sell high, meaning they purchase investments when prices are lower and sell them when prices have appreciated. However, emotions often drive investors to do the exact opposite.
When markets are performing well, optimism is high, and investors feel confident and may fear missing out on the gains, leading them to buy at peak prices when assets are overvalued. But when markets decline and prices drop, fear takes over. Many investors panic, worrying about further losses, and sell their investments at rock bottom prices, locking in their losses instead of waiting for a market recovery. This knee-jerk reaction prevents them from benefiting when markets rebound.
This cycle of emotional investing—buying when the market is high and selling when it is low—can significantly damage your portfolio’s long-term performance. Missing just a few of the market’s best-performing days due to poor timing can result in dramatically lower returns over time, even causing you to not reach your financial goals. By maintaining a disciplined asset allocation strategy and staying invested through market fluctuations, investors can avoid these costly mistakes and maximize their chances of long-term success.
Ask Yourself:
- How Well Can I Handle Market Volatility?
- How do I react when the market falls? Do I feel tempted to sell or panic, or can I stay calm and stick to my plan?
- If my portfolio drops 10%, 20%, or more, will I still feel comfortable with my investments, or would I regret my decisions?
- Have I made emotional investing mistakes in the past, such as panic selling or chasing hot stocks?
2. What is Your Perfect Asset Allocation? The Key to Maximizing Growth and Managing Risk
A common rule of thumb for choosing the right asset allocation based on age is the “100 minus your age” rule (or some variations like “110 minus your age” for more growth-oriented investors). This rule suggests subtracting your age from a set number to determine the percentage of your portfolio that should be in stocks, with the remainder in bonds.
- Younger Investors (20s-30s) → Mostly stocks (80-90%), few bonds (10-20%)
- Middle-Aged Investors (40s-50s) → Balanced mix (60% stocks, 40% bonds)
- Retirees (60s-70s) → More conservative (30-50% stocks, 50-70% bonds)
While these rules provide a general guideline, the right allocation depends on your comfort level with risk, financial goals, and income needs in retirement.
Ask yourself:
- Is My Asset Allocation Right for Me?
- Do I have the right mix of equities, bonds, and cash to match my risk tolerance, timeline and needed growth and income from my portfolio?
- Are my holdings balanced between high-risk, high-reward assets like stocks, and safer, more stable options like bonds?
- Am I overexposed to a single sector (e.g., technology) or region, leaving me vulnerable to specific market downturns?
3. Are Taxes Eating into Your Returns? How to Invest Smarter and Keep More of Your Money
Taxes are often overlooked in portfolio planning but can significantly erode returns. By being proactive, you can maximize your after-tax income leaving more money in your portfolio and less money in the IRS’ pocket.
Asset location can boost your after-tax returns without taking on more risks. It’s about choosing the right “home” for your investments based on how they are taxed. Just like some foods stay fresher in the fridge while others belong in the pantry, certain investments belong in tax-advantaged accounts, while others are better in taxable accounts.
Here’s why this matters:
- Some investments, like bonds, produce regular interest income, which is taxed at your highest tax rate—potentially 37% or more if you’re a high earner. But if you hold these investments in a tax-advantaged account like an IRA or 401(k), you won’t owe taxes on the income each year. Instead, you delay taxes until you withdraw the money in retirement, when you might be in a lower tax bracket. This helps you keep more of your returns working for you overtime.
- Some investments, like stocks, grow in value over time. This is called capital gains, and they are taxed at a much lower rate when you sell them, anywhere from 0% to 20%, depending on your income. By holding stocks in a taxable brokerage account, you can take advantage of these lower capital-gains tax rates.
Investing isn’t just about choosing the right investments for your retirement or taxable accounts, it’s also about keeping them in the right proportions over time to maximize returns and manage risk.
Even if you start with a well-diversified portfolio, market movements will gradually throw your allocation off balance. When one asset class performs exceptionally well, it can become an outsized portion of your portfolio, exposing you to more risk than you intended. On the flip side, underperforming assets might shrink to a much smaller percentage, limiting your opportunity for future growth when they eventually recover.
This is where the power of rebalancing comes in. By periodically adjusting your portfolio back to its target mix, you can capture gains, control risk, and enhance long-term performance. Studies show that a disciplined rebalancing strategy can add 1–2% per year in after-tax returns by ensuring you are consistently buying low and selling high, making a big difference in how much your money grows over time.
Ask yourself:
- Are my investments in the right accounts to minimize taxes?
- Do I have tax-inefficient investments, like bonds, in tax-advantaged accounts (IRA, 401(k)) to shield their interest income from high taxes?
- Am I keeping tax-efficient investments, like stocks, in taxable accounts to take advantage of lower capital gains tax rates?
- Has my portfolio drifted from its original mix, increasing my risk?
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- Have recent market swings left me with too much in stocks or too little in bonds compared to my original plan?
- Am I taking on more risk than I intended because I haven’t rebalanced?
4. Am I Prepared for a Liquidity Crisis? Why Cash Access Matters More Than You Think
Life is unpredictable, and when unexpected financial challenges arise, having enough liquidity can make all the difference. Liquidity refers to how easily you can access your money without losing value. Cash in a bank account is highly liquid because you can use it immediately, while investments like real estate or stocks are less liquid because selling them takes time and may come with financial consequences.
A liquidity crisis happens when you need cash quickly but don’t have enough easily accessible funds, forcing you to sell investments at a bad time, use high interest credits cards or tap retirement accounts early, resulting in taxes and penalties. To protect against this, create an Emergency Fund and sock away 3-6 months’ worth of living expenses in an easily accessible account.
A high-yield savings account is one of the best places to keep your emergency fund. These accounts, offered by online banks and some credit unions, pay significantly higher interest rates than traditional savings accounts while keeping your money fully accessible. As of February 2025, banks such as Bread Financial were offering rates as high as 4.40%. Other high-interest options include Marcus and Ally Bank.
Whether it’s a medical emergency, job loss, major home repair, or family crisis, not having the right liquidity strategy can put your financial security at risk. Building an emergency fund is non-negotiable. It ensures that during unexpected events, you can meet your financial obligations without derailing your long-term investment strategy.
Ask Yourself:
- If I lose my job tomorrow, do I have enough accessible cash to cover 3-6 months of living expenses without selling investments or relying on credit cards?
- Am I keeping my emergency fund in a high-yield savings account or another easily accessible option that earns competitive interest?
- Would I be forced to sell stocks, real estate, or tap into my retirement accounts (and face penalties) if I had an unexpected, large expense?
- Have I factored in potential emergency costs like medical bills, home repairs, or family crises when determining how much liquidity I need?
Bonus Tip: Have I Consulted a Professional?
While self-assessment is important, a financial advisor can provide expert insights to strengthen your portfolio. They can help identify blind spots, optimize asset allocation, and improve tax efficiency, ensuring your investments align with your goals.
Advisors also help remove emotional decision-making, preventing costly mistakes like panic-selling during downturns. They can stress-test your portfolio, guide rebalancing, and provide tax-efficient withdrawal strategies for retirement.
Even if you manage your own investments, a yearly check-in with a professional can offer fresh perspective and peace of mind, helping you stay on track and maximize your long-term wealth.
Final Thoughts
Investing isn’t just about picking the right stocks or bonds—it’s about building a resilient portfolio that can withstand market swings, tax burdens, and life’s unexpected challenges. True financial success comes from having a well-thought-out plan that includes diversification, proper asset allocation, tax efficiency, and liquidity management. By focusing on these key principles, you can protect your wealth, grow it over time, and ensure that you’re financially prepared for whatever comes your way. At the end of the day, your financial security isn’t just about how much money you have, it’s about how well you manage it.
About the Author
Stacy Francis is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded over 20 years ago. She is a Certified Financial Planner® (CFP®), Certified Divorce Financial Analyst® (CDFA®), as well as a Certified Estate and Trust Specialist (CES™), who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth.
She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 25,000 women.
