Key points:
- Year-end reviews often go wrong for two reasons: we chase what worked in 2025, and we assume 2026 will be a smoother repeat.
- That’s when portfolios become fragile — because the biggest risk isn’t the next headline. It’s the hidden bet you already have.
- A simple fix: run five quick “headline shocks.” Think of it as a portfolio fire drill. If the alarm rings, do you know what breaks first?
Year-end is when investors feel two temptations at once:
- Chase what worked in 2025, and
- Assume 2026 will be a smoother extension of the same trend.
That’s usually when portfolios become fragile — because the biggest risk isn’t the next headline. It’s the hidden bet you’re already making.
A simple way to make your portfolio sturdier is to run a mental “stress test” against plausible shocks. If the alarm rings, do you already know where the exits are?
Shock #1: AI shock — “AI demand slows or the market wants proof”
This isn’t “AI is over.” It’s “AI gets picky.” The market starts asking: Where are the profits? Who has pricing power? Who has real cash flow?
What can trigger it
- AI spending pauses or becomes more selective
- Guidance disappoints vs big expectations
- Valuations compress even if growth stays decent
Most vulnerable parts of the portfolio
- Crowded AI leaders and anything priced for perfection
- High-multiple ‘future earnings’ stocks (long-duration growth)
- Second- and third-order AI plays that depend on nonstop capex acceleration
- The “AI everywhere” portfolio where multiple holdings are basically the same bet
More resilient pockets
- Broader value-chain exposure (less single-name reliance)
- Companies with cash flow today and strong balance sheets
- “Picks-and-shovels” exposures with diversified end-demand (less binary)
Shock #2: Inflation / rates shock — “10Y yields +1%” (or cuts get delayed)
A +1% move in long yields can happen for many reasons:
- Inflation worries return
- Fiscal/issuance concerns push long yields higher
- Central banks stay tighter for longer
- Growth is fine, but markets reprice the “fair” rate
Most vulnerable parts of the portfolio
- Long-duration equities: high-multiple growth, “future earnings” stories
- Long-duration bonds (obvious)
- Portfolios that combine both: “double duration” (tech-heavy + long bonds)
- Rate-sensitive real assets (some REITs/infrastructure), especially if leveraged
More resilient pockets
- Cash-flow-now equities
- Shorter-duration fixed income / cash-like holdings
- Businesses with pricing power
Shock #3: Growth shock — “Earnings expectations reset lower”
This is the “soft landing becomes less soft” scenario:
- Companies guide down
- Margins compress
- Consumers slow
- Analysts cut forecasts
Most vulnerable parts of the portfolio
- Cyclicals: industrials, consumer discretionary, transports, economically sensitive semis
- Small caps (earnings + refinancing sensitivity)
- High yield credit / weaker balance sheets
- Expensive stories with thin cash flow buffers
More resilient pockets
- Quality balance sheets and stable cash flows
- Select defensives (though valuations still matter)
- Portfolios with a liquidity buffer (so you don’t sell at the worst time)
Shock #4: USD shock — “USD moves 5–10% quickly”
FX shocks don’t need drama — they can come from rate differentials, risk sentiment, or policy surprises. And they can dominate returns even when the underlying assets behave.
If USD strengthens
Most vulnerable
- EM equities/credit and EM currencies
- Some commodities (often, not always)
- Investors who are effectively “short USD” without realising it
If USD weakens
Most vulnerable
- Portfolios overweight USD assets with no non-US diversification
- USD cash-heavy portfolios (opportunity cost if global assets rip)
More resilient pockets
- A portfolio that decides what FX should do (hedged vs unhedged rules)
- Diversified regional exposure where FX is an intentional part of the plan
Shock #5: Liquidity shock — “Vol spikes and spreads widen”
This is the one that feels sudden:
- Volatility jumps
- Credit spreads widen
- Crowded trades unwind
- Things you thought were liquid… aren’t
Most vulnerable parts of the portfolio
- Crowded trades (everyone owns it, so everyone sells it)
- Leveraged positions (forced selling risk)
- Illiquid themes (small names, niche exposure)
- High yield / EM credit when spreads gap wider
More resilient pockets
- Cash and high-quality liquidity
- Simpler portfolios with fewer overlapping bets
- Higher-quality credit (still can fall, but usually less fragile)
How to use this framework
- Write down your top 10 holdings (or main buckets).
- Next to each, tag which shock hurts most: AI / rates / growth / USD / liquidity. Remember there can be more than 1 shock per holding. Some examples are below:
- Apple: Growth shock (consumers delay upgrades), USD shock (strong USD can hurt overseas revenue)
- Nvidia: AI shock (AI spend pauses or competition emerges), Rates shock (high valuation sensitivity to yields), Liquidity shock (if crowded positioning unwinds fast)
- JP Morgan: Growth shock (credit cycle deterioration, loan losses rise), Rates shock (depends on curve shape), Liquidity shock (if spreads widen sharply)
- Exxon Mobil: Growth shock (oil demand slows)
- Gold: Rates shock (higher real yields can pressure gold), USD shock (stronger USD can pressure gold)If 7 out of 10 fall under the same shock, you found your hidden bet.
- The fix isn’t “sell everything.” It’s to add one offsetting behaviour. For instance, if your hidden risk is
- AI: consider reducing AI exposure and set a theme cap (e.g., “AI-linked holdings can’t exceed X% of equities”)
- Growth: consider adding defensive/quality exposure
- Liquidity: consider raising your liquidity floor by reducing leveraged and crowded trades and allocating more in liquid assets
Closing thought
You don’t need to predict 2026. You need to avoid building a portfolio that only works if one story stays perfect.
If 70%+ of your portfolio is vulnerable to the same shock, you don’t have a diversified portfolio — you have a high-conviction macro view you may not realise you’re running.
