ETFs & Funds
Home›ETFs & Funds›Fund Industry›Risk management, not just diversification, is key for…
Risk management, not just diversification, is key for drawdowns
ETF Trends argues portfolios should be designed around how much drawdown investors can tolerate, because investors often abandon plans during accelerating volatility.
ETF Trends says the industry has long promoted diversification, such as holding stocks, bonds, and other asset classes, as the answer to risk. But the outlet argues that diversification is not the same as risk management when markets become stressed.
According to ETF Trends, the core question during market stress is whether a portfolio includes enough risk management guardrails to prevent investors from abandoning a plan. The outlet points to drawdowns as a driver of emotional pressure, saying investors experience risk through uncertainty and volatility, not through portfolio charts.
ETF Trends says traditional portfolio construction often starts with asset allocation decisions, like how much equity versus fixed income, but it believes the discussion should start instead with how much drawdown an investor can tolerate. It describes its “Portfolio Playbook” as a framework intended to combine tactical risk management disciplines with purpose, emphasizing structure, discipline, and clarity before markets test investors.
The outlet also argues that portfolios designed only for favorable conditions are not fully designed, and that tactical risk management focuses on how a portfolio is expected to behave when market conditions shift and drawdowns accelerate. It frames the playbook as something that exists before markets become chaotic, helping decisions get made when emotions are lower.