Built for the Last Decade: The Hidden Risks In Today's Portfolios
- Alan Dunne
- Jun 22
- 4 min read

June 2025
Despite the prevarications on tariffs, equities have bounced sharply from the April losses.
Equity-heavy investors will feel vindicated that buying the dip was once again the right strategy, while the naysayers are left reflecting on Keynes’ warning: “The market can stay irrational longer than you can stay solvent”.
It’s possible it’s not all irrational exuberance. With inflation edging lower, the ECB cutting rates and no hard evidence of a downturn yet, equities could grind higher.
But that doesn’t mean the risks have disappeared.
Tariffs, Trump, and Trouble Ahead?
Valuations for US equities remain elevated. The forward P/E ratio of about 22 is historically associated with lower-than-average future returns. Even if trade deals are cut, it looks like tariffs are here to stay—likely around 10%—which will be a headwind for the consumer and corporate earnings growth.
Fiscal concerns continue to lurk in the shadows. The ambitions of DOGE have been scaled back, and Trump’s “Big Beautiful Bill” could add close to $4 trillion to the deficit over the next decade. All roads seem to point to higher yields -but when?
These macro risks don’t guarantee a downturn, but they make it essential for investors to think critically about how their portfolios are built and where the stress points may lie.
In short, this is not a time for complacency. As JFK once said “the time to mend the roof is when the sun is shining”.
Why Diversification Often Fails
In reviewing portfolios for a range of investors, whether it’s business owners, family offices or institutions, I see the same blind spots.
While portfolios appear diversified, with allocations to multiple asset classes, the actual level of resilience is often much weaker.
Multi-asset or diversified growth funds, often marketed as “all-weather”, suffer from the same flaw: a bet on continued sunshine.
A wide range of assets—from equities to private equity, private credit, and real estate—tend to perform well when the economy is solid. But in a deep recession, they typically underperform together.
Equally, many strategies—from long-duration bonds to equities—do well when inflation is contained and interest rates are falling. What about a regime of rising inflation?
Weak or contracting growth at a time of inflation—stagflation—is the hardest scenario. While stagflationary risks have flared at times in recent years, we haven’t seen a prolonged stagflationary episode since the 1970s.
Most portfolios are still ill-prepared for either a severe downturn or a stagflationary environment.
Why Portfolio Construction Still Matters
Sometimes the problem is an absence of truly diversifying strategies. Other times, the right elements are there—but poorly sized or misaligned.
Take a 50/50 equity/bond portfolio. On the surface, it looks balanced: equities for growth, bonds for defence. Between 1980 and 2020, long-term government bonds consistently rose when equities sharply fell as central banks came to the rescue cutting rates.
That relationship looks less reliable going forward, particularly if inflation proves sticky or investors require higher yields for holding government bonds. As 2022 showed, equities and bonds can fall together.

Reducing the bond duration might lower interest rate risk but turns the bond allocation into something more like cash: low return and limited ability to generate meaningful return.
Adjusting for risk matters as well. You might see a 50% drawdown in equities, but as bonds are less volatile, even if bonds perform well, they may only offset a fraction of the equity losses.
The composition matters, too. Is the equity sleeve dominated by US growth stocks? For euro-based investors, the risk compounds further if growth underperforms and the dollar weakens.
On the bond side, is the exposure to government debt or to credit? Investment grade, high yield, or emerging market bonds can offer income in calm markets. However, in periods of acute stress, concerns about creditworthiness increase and these assets behave much more like equities—just when you want them to be doing the opposite.

Some investors have embraced alternatives. But calling something “private equity” rather than “public equity” doesn’t fundamentally change its behaviour in a downturn. The fact that you pay more for the private versions – only to get the same downside - adds insult to injury.
Even those who include truly diversifying strategies—like hedge fund strategies such as global macro—can fall short by under-allocating. A 2–3% position in something that works isn’t enough to move the needle when you need it most.
The Total Portfolio Approach
Among large institutions there is a growing trend to shift from traditional asset allocation models toward what’s called a “total portfolio approach.” The essence is simple: focus less on asset class names and more on the overall portfolio’s risk exposures.
While this framework has taken hold in sovereign funds and endowments, the logic applies at any scale: understand what assets you own, how they behave in stress periods, and what role each part plays.
There are ways to construct portfolios that don’t rely on predicting the next crisis—yet can survive when one inevitably comes. It starts with better diversification, more thoughtful sizing, and a clearer understanding of what drives portfolio risk.
Most portfolios I see still reflect the last decade more than the next one. That may not matter—until it does.
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