Are your client portfolios prepared for the next market selloff?

A sharp market selloff can come out of the blue.

It’s easy not to think about that when the market’s in an uptrend. However, the tariff-driven market plunge in April 2025 is just one recent reminder. In addition to the April selloff, four of the top 10 largest market drawdowns since 1927 have occurred after the year 2000. 

We believe major market declines happen frequently enough to be an expected part of your clients’ long-term investment horizon.
              

Assessing Portfolio Risk with Five Questions


The time to explore hidden risks in your client portfolios is before a market selloff and not during one. A quick risk audit is a good first step. You may find that slight portfolio shifts are all that are required to help improve portfolio risk management. 


Five key questions that an advisor should include in their risk audit:

  1. Is your sell discipline well defined, consistent and successful?
  2. When volatility spikes, how much of your portfolios can you shift into cash or other defensive positions before misaligning risk profiles?
  3. Are there underperforming investment managers that you should switch but haven’t?
  4. Have you done a correlation analysis among portfolio allocations and exposures?
  5. How concentrated are your portfolios – by sector, asset class or manager – and what happens if those areas face pressure?

Danger Signs


We believe it’s always important for your risk management to be as strong as possible. However, we think risk management takes on a greater urgency when you consider two key risks in today’s markets.

  1. Valuations near levels seen before the dot-com crash.
    Take the cyclically adjusted PE ratio (CAPE) of the S&P 500 Index, a widely followed metric. It represents the index’s current price divided by the 10-year moving average of its inflation-adjusted earnings. As we enter 2026, it stands at 40.58. The last time it rose above 40 was during the dot-com “bubble.
     
  2. Correlation between bonds and equities has risen 
    Historically, Treasury bonds and other investment-grade bonds have been seen as a ballast in a portfolio during times of equity market volatility.

    However, correlation between stocks and bonds can be unstable, and investment-grade bonds have become more correlated to equities. 

    Rolling 24-month correlation between the Bloomberg U.S. Aggregate Bond Index and the S&P 500 Index.
Rolling 24-month correlation between the Bloomberg U.S. Aggregate Bond Index and the S&P 500 Index.


Risk Management: Next Steps


As you audit portfolios for risks, see if their bond allocations have become more correlated with their equity exposures. If their correlations have increased at a time when the market’s valuation is historically high, consider revisiting your fixed income allocations and risk management approach.

 

 

 

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There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.
All investments involve risk, including the risk of loss of principal. More information related to the risks of investing
in Ocean Park Strategies/ Models/Programs can be found in Ocean Park’s Form ADV Part 2A.

The S&P 500 Index (Standard & Poor’s 500 Index) – A market-capitalization-weighted index of the 500 largest
U.S. publicly traded companies. The S&P is a float-weighted index, meaning company market capitalizations are
adjusted by the number of shares available for public trading.

Bloomberg US Aggregate Bond Index – A broad-based flagship benchmark that measures the investment grade,
US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and
corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency).

Correlation – A statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between -1.0 and +1.0.

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