How to De-Risk Your Portfolio in 5 Different Scenarios
If you're worried about the market or your personal circumstances, take these steps to help you sleep at night.
It's true what people say: If you want the most reward, you have to take the most risk. But prudent investing is about taking calculated risks, not blind ones. And after three consecutive years of hardy stock returns, it may be time to dial down the risk in your portfolio, in preparation for the eventuality of a market stumble.
Or your circumstances in life might dictate a more cautious stance, for whatever reason. De-risking is about planning ahead. “After the risk has happened, it’s too late,” says Tim Steffen, director of advanced planning in the wealth management division of investment firm Baird.
In a classic sense, de-risking involves scaling back on stocks and moving into less-volatile instruments, such as bonds and cash. Some strategists, including Liz Thomas, head of investment strategy at SoFi, don’t think market conditions warrant that right now, and you might agree. Similarly, thirty-something investors, who don’t need to tap their retirement savings for decades, and investors who are already conservatively positioned may not need to de-risk.
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In those cases, staying the course may be the better tack — and actually avoids the risk of not meeting your goals by investing too conservatively for long-term success.
But other situations present good opportunities to shore up your portfolio by making appropriate tweaks. We’ll review some de-risking strategies for several circumstances, including temporary hurdles (your job is in jeopardy or you’re nearing retirement), more lasting ones (such as a change in your comfort level with risk), and other situations.
The first steps to de-risk your portfolio
Consider some best practices in your quest for a safer portfolio. It’s important to remember that de-risking doesn’t mean upending your current investment plan or selling everything and moving to cash. Rather, it’s about finding ways to tame the risk in your portfolio without dramatically shifting the allocation of your investments.
In some cases, no selling may be required; you simply invest any new money you’re putting in the market “a little differently,” says Baird’s Steffen.
Start with a review of your portfolio. You should have an investment plan already in place — one centered on a diversified portfolio that holds a mix of foreign and U.S. stocks, bonds, and cash and that is aligned with your time horizon and your tolerance for risk.
These days, after three good stock-market years, your portfolio might be more aggressively positioned than you’d prefer. A simple rebalancing — selling securities that have done well and buying pockets of the market that have underperformed — could be enough to lower the risk level of your portfolio. And “now is a good time to lock in some gains,” says Baird’s Steffen.
Next, identify any life changes or worries that may be keeping you up at night. If your cash needs, investment goals, risk tolerance or time horizon have become more challenging, some de-risking might be in order.
“Scale any shifts you make in your portfolio to the scale of the risk involved,” says David Kressner, a managing adviser at Altfest Personal Wealth Management in New York City.
Finally, you may want to assess how any portfolio tweaks you’re considering may affect your chances of achieving your investment goals. That’s what Cassandra Rupp, a senior wealth adviser at Vanguard, does before making any moves in her clients’ portfolios.
Rupp stress tests the new portfolio in a Monte Carlo simulation, which runs through hundreds of possible market scenarios to find out how it might perform and, most importantly, how likely the altered portfolio will be to accomplish the client’s investment objective. “So, it’s not just about how we might be revising the investments,” says Rupp. “It’s also revisiting the success rate of the new long-term plan.”
Read on for ways to de-risk your portfolio in five different scenarios, including investments to consider. All returns and data are through January 31, 2026, unless noted otherwise.
Scenario 1: You're worried about a stock market bubble.
If a bubble in artificial-intelligence-related stocks concerns you, you’re probably overinvested in them, says Baird’s Steffen. Of course, these days, most of us are. The AI-stock-heavy tech and communications services sectors combined currently make up nearly half of the S&P 500 index.
Diversification is the name of the game in this scenario. “Rarely does a bubble affect all things in a uniform type of way,” says Kressner. For instance, in the early 2000s, when the dot-com bubble burst, a well-diversified portfolio, with exposure to non-tech sectors, small-company shares and foreign stocks, weathered the downturn well, he says.
Beef up your stakes in non-tech parts of the market with an aim to lower your tech exposure to about 25% of your overall stock portfolio.
“This is a good time to spread your money out,” says Lewis Altfest, chief investment officer at Altfest Personal Wealth Management. “Tech stock valuations are kind of rich right now. And I think other parts of the market are going to do better than technology, or at least keep up with it, and with less risk,” Altfest says.
Non-tech sectors to consider include health care and consumer staples, where investors are currently “underexposed,” says SoFi’s Thomas.
Our favorite diversified health care fund is Fidelity Select Health Care Portfolio (FSPHX), a member of the Kiplinger 25, the list of our favorite actively managed no-load funds.
Manager Eddie Yoon has outpaced his competition over the past three, five, 10 and 15 years. Vanguard Consumer Staples Index (VCSAX) and its exchange-traded-fund twin that trades under the symbol VDC both charge just 0.09% in annual expenses and boast five-and 10-year annualized records that rank among the top decile of consumer staples funds.
Alternatively, an equal-weighted index fund, such as Invesco S&P 500 Equal Weight ETF (RSP), can lessen overconcentration in huge tech stocks because it holds every stock in the S&P 500 in equal proportion.
Or buy funds that focus on midsize and small-company stocks. Small caps will benefit from continued interest rate cuts; mid-cap stocks are ripe pickings for all those mergers and acquisitions deals that many expect to pick up in pace this year.
iShares Core S&P Mid-Cap (IJH) and iShares Core S&P Small-Cap (IJR) are members of the Kiplinger ETF 20, the list of our favorite exchange-traded funds, as is the aforementioned Invesco S&P 500 Equal Weight fund.
Tilting toward large-company value strategies is another way to diversify. You’d be surprised to learn, however, that many large-value funds count Nvidia, Apple and Microsoft among their top holdings. Two that don’t: Vanguard Equity Income (VEIPX) and Dodge & Cox Stock (DODGX).
Both funds are members of the Kiplinger 25. Index-fund lovers might consider Vanguard Value Index (VVIAX), which also trades as an ETF under the symbol VTV .
Explore abroad. Despite a solid performance in 2025, foreign stocks still trade at bargain prices relative to U.S. shares on multiple measures.
Vanguard Total International Stock (VXUS) tracks an index that includes nearly every publicly traded foreign stock in developed and emerging countries. The fund has climbed 35.2% over the past 12 months. Altfest favors international value-oriented stock strategies these days.
One such fund that catches our eye: iShares Edge MSCI International Value Factor ETF (IVLU), which tracks an index of foreign large and midsize companies that trade at low valuations. Over the past 12 months, the fund has gained 50%. Its 10-year annualized return, 10.8%, isn’t shabby, either. Both trailing returns outpace the MSCI EAFE index of stocks in foreign developed countries.
Scenario 2: Your job is insecure.
Layoff fears are high these days, according to a recent survey by Zety, a website that helps job seekers write résumés and cover letters. But if you’re laid off, unless you’re close to retirement age, you’ll likely find work again.
So the best de-risking strategy — before the pink slip arrives — is to leave your portfolio allocation alone but focus on having enough cash to cover your costs while you’re looking for new employment.
Build an emergency fund that covers at least three to six months of essential expenses — rent or mortgage, car payments, gas, food, health care costs, insurance, and utilities. Planning for enough to cover just the basics, of course, means fewer dinners out and other such treats while you’re looking for a new job.
If denying those pleasures is a downer to you, then you may need to pad your emergency fund more, says Jonathan Lee, a wealth management adviser at U.S. Bank. And bear in mind, depending on your work experience, income level and how niche-y your skill set is, it may take you longer to find a job than someone in the early stages of their career.
In that case, a six-month emergency fund makes more sense than one that covers just three months.
You should consider family-income dynamics when you’re deciding how much to save in your emergency fund, too. If you’re single, or your family pulls in two fairly equal salaries, then a three-month fund may be sufficient. But if household income is lopsided or you rely on one income (or you and your partner work at the same place or in the same field), an emergency fund that covers closer to six months is a good goal, says U.S. Bank’s Lee.
Finally, factor in psychology. For nervous Nellies, a six-month emergency fund can make sense regardless of job experience or family dynamics. Setting aside cash over a year or even two years is a reasonable goal by balancing saving for your retirement and an emergency fund at the same time.
If you’re already out of work and have no emergency fund, you may have to tap other resources, such as a home-equity line of credit, if you have one.
If you must sell investments, tee up assets in a taxable account first, both to avoid an early-withdrawal tax penalty if you’re younger than 59½ (you can make penalty-free withdrawals of contributions from a Roth account) and to keep your tax-deferred assets growing. Aim to keep your overall allocation in place by selling proportionately across your portfolio so that your long-term investment plan remains unchanged.
Keep your emergency stash in an interest-bearing account that beats inflation (running about 2.7%). “You may not need to rely on it for years, but over the course of time, inflation can seep into your ability to afford your lifestyle as you know it,” says Lee.
At last report, top yields for both high-yield savings accounts and money market bank accounts were at or above 4%. Among money market mutual funds, Vanguard Federal Money Market Fund (VMFXX), the second-largest in the country by assets, offered 3.6%; the biggest money market mutual fund, Fidelity Government Money Market Fund (SPAXX), paid 3.3%.
Read more: The Best High-Yield Savings Accounts
Scenario 3: You've entered the retirement danger zone.
The five years before and after you retire, a period known as the retirement danger zone, is a critical time in your investing life. A major market downturn during that stretch could shrink your portfolio just when you need to start pulling from it.
Over time, that can negatively impact your ability to outlast your nest egg. “It’s called the sequence-of-returns risk,” says U.S. Bank’s Lee. We’re living longer, too, which adds to the danger.
The best way to protect yourself against a sequence-of-returns risk is to make sure you’ve got enough cash on hand to cover two to three years’ worth of expenses in retirement, after accounting for income from other sources, such as Social Security or a pension.
Consider putting aside enough for necessary expenses, as well as fun money, says Lee. Extremely risk-averse investors might consider holding up to five years of expenses, but three years is a good middle ground. The goal is to buy enough time to ride out a tough market, should one come along, so you aren’t forced to sell investments in a down market.
Ready cash means money that’s easily accessible in a high-yield savings account, money market bank account or a money market mutual fund, all of which yield roughly 3.0% to 4.0%, nationwide, at last report.
You can use this Bankrate tool to find and compare savings options fast:
Investors in the retirement danger zone should consider de-risking the medium-term portion of their investment portfolio, too. In a “bucket” approach to retirement-portfolio construction, that means holding the bucket of money you expect to tap roughly four to 10 years from now in a combination of cash and high-quality bonds and bond funds.
Our favorite actively managed intermediate-term bond funds include Baird Aggregate Bond (BAGSX), which currently yields 3.9%; Fidelity Investment Grade Bond (FBNDX), which yields 4.2%; and Vanguard Core Bond ETF (VCRB), 4.4%.
An intermediate-term government fund we like is Vanguard Intermediate Term Treasury (VFITX), which is actively managed and yields 3.7%. For now, short-term bond funds still offer good yields. Consider these stand-out short-term bond funds: iShares Short Duration Bond Active (NEAR), which yields 4.1% — it’s a member of the Kiplinger ETF 20 — and Vanguard Short-Term Federal (VSGBX), which currently yields 3.4%.
Lee says a small stock allocation in the medium-term bucket is not out of order, as long as the stocks are high-quality, well-established, large-company stocks from the U.S. or developed foreign countries. “These stocks will grow over time, but they aren’t all the way out on the risk spectrum,” he says.
To add high-quality companies to your portfolio, take a look at these two funds. Pacer US Cash Cows 100 ETF (COWZ) focuses on large companies with the highest free-cash-flow yield. That’s free cash flow (money left over after operating expenses and spending to maintain or upgrade property and equipment) relative to a company’s market value.
The fund has returned 14.6% annualized over the past five years. Notably, it gained 0.2% in 2022, a year when the S&P 500 lost 18.1%. JPMorgan U.S. Quality Factor ETF (JQUA) turned in a solid 14.2% five-year annualized return with below-average volatility.
It tracks an index that sifts for companies that meet 10 quality-oriented criteria, including measures of profitability, financial risk and earnings quality.
For exposure to high-quality foreign stocks, consider Invesco S&P International Developed Quality ETF (IDHQ), an index fund that homes in on three fundamental ratios: Return on equity (a profitability measure), accruals ratio (an earnings-quality measure) and financial-leverage ratio (a measure of financial stability and solvency). Or consider a foreign dividend-stock fund — such funds tend to offer smoother rides.
Kiplinger 25 member Janus Henderson Global Equity Income (HFQTX) sports below-average volatility and has generated a robust 6.4% yield over the past 12 months.
Ideally, you’d be making de-risking moves in a tax-sheltered account, says Christine Benz, director of financial planning and retirement at Morningstar.
“But if you’re still working and contributing to those retirement accounts, think about channeling your new contributions to those safer holdings as a way to move up your allocation there,” she says.
Scenario 4: Your risk tolerance is lower than you think.
It happens: You thought you could withstand a bear-market drop in your portfolio, but now you’re not comfortable with it. The early-2025 tariff tantrum, when the S&P 500 dropped 19% in less than seven weeks, was a wake-up call for many investors.
If your ability to withstand stock market losses has changed, there are ways to maintain exposure to equities but pare down the volatility, or even limit potential losses — you just may have to give up some potential gains.
Defensive sectors, such as consumer staples and utilities stocks, tend to be steady Eddies, in part because many sport robust dividends that can cushion any losses (or shore up slim returns).
Over the past decade, for instance, shares in companies that sell essential daily household products have been nearly 20% less volatile than the broad market. The aforementioned Vanguard Consumer Staples ETF (VDC) ranks among the top 8% of all consumer staples funds over the past three years. Utilities, meanwhile, are a classic defensive play. Consider Invesco S&P 500 Equal Weight Utilities ETF (RSPU).
Focusing on more-stable stocks may be a good move this year, says SoFi’s Thomas, because it’s a midterm election year, and those tend to be more volatile.
A buffered ETF uses options tied to a specific index to cushion losses to a predetermined degree in exchange for a cap on potential gains.
Buffered ETFs require some timing when you buy, because the options are set to cover a specific stretch — 12 months, for example — so optimally, you’ll get in at the start of the period. Once purchased, however, they can be held indefinitely, because they roll over to a new 12-month stretch.
Buy shares in Innovator U.S. Equity Power Buffer ETF May Series (PMAY) in late April, for instance. It protects you against the first 15% in losses in the S&P 500 between the start of May 2026 and the end of April 2027.
The cap on gains changes from one-year period to one-year period and had not been set yet at press time. The fund’s cap on gains over the past 12-month period that ended in April 2026 was 13.1%, net of fees.
These funds come in many iterations. Some are tied to the performance of other indexes, including the Nasdaq Composite, as well as benchmarks for small-company stocks, emerging and developed foreign stocks, and even bonds. The reset period, also known as the outcome period, varies, too. Some buffered funds reset over three months, six months or two years, for example.
Innovator Defined Wealth Shield ETF (BALT) offers protection against a 20% drop in the S&P 500 every three months. In its most recent quarterly stretch, which ended in March, the fund’s three-month cap on gains was 2.1% (which implies an annualized cap of more than 8% over 12 months). With its hefty buffer on losses, this fund tends to behave more like a bond investment.
Scenario 5: You fear a recession ahead.
Most economists expect slower growth but no recession in 2026. But just the fear of a recession can affect the stock market, whether one actually occurs or not, says Jim Paulsen, a former Wall Street strategist who writes the newsletter Paulsen Perspectives.
In turn, a calamity in the market could dent what’s known as the “wealth effect,” causing investors to cut back on spending and delivering a blow to the economy.
Diversification is your first line of defense in a recession. Make sure your investments are appropriately spread across sectors, company size, geography and even investment style (value and growth).
A Wells Fargo Investment Institute study shows that a portfolio with a wide mix of investments outperformed the S&P 500 by an average of seven percentage points over the past several recessions.
Retune your portfolio so it’s more defensive. A defensive portfolio — one that’s always positioned for an economic downturn — can allow you to maintain an appropriate mix of stocks, bonds and cash, but tilting toward more-conservative selections within those asset classes may provide a smoother ride, which can help investors stay the course, says Frank Maltais, a certified financial planner at Fidelity in Portland, Maine.
On the stock side, load up on high-quality names that are less economically sensitive, are low in volatility and pay dividends. In addition to funds we’ve already named, such as Fidelity Select Health Care, Vanguard Equity Income, Invesco S&P 500 Equal Weight Utilities and Vanguard Equity Income, we also like Capital Group Dividend Value (CGDV), which invests in stocks of established U.S. firms that generate above-average dividend yield (greater than the S&P 500).
Over the past three years, it has returned 23.9% annualized, beating 99% of its peers (large-value funds), with volatility that was a touch below average.
Go high-quality on the bond side, too, and hold short-and intermediate-term Treasuries, which offer ballast in stock-market downturns, as well as government-guaranteed mortgage bonds. You can buy Treasuries directly from the government at Treasury Direct.gov and hold to maturity.
Among funds, iShares U.S. Treasury Bond ETF (GOVT) holds debt with short-, medium-and long-term maturities and yields 3.9%. More than 55% of the portfolio is invested in bonds that mature in one to five years. Target the short end of the yield curve with iShares 1-3Year Treasury Bond ETF (SHY), which yields 3.4%.
If you want to tilt more toward medium-maturity debt, Vanguard Intermediate-Term Treasury (VFITX) holds a mix of bonds that mature in three to seven years. Our favorite mortgage-bond funds include the index-based Vanguard Mortgage-Backed Securities ETF (VMBS), which yields 4.0%, and the actively managed fund Vanguard GNMA (VFIIX), which yields 3.6%.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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