Looking back at 2025, the year was shaped less by a single shock or unexpected source of risk than by the simultaneous failure of several assumptions that had long gone unchallenged. As those assumptions gave way, differences in portfolio construction became more visible, particularly between portfolios built with sustained intent and those that had accumulated incrementally over time.
In extended periods of stable returns and predictable correlations, portfolios tolerate looseness without immediate penalty. When regimes change, that tolerance disappears, and what follows is not a discovery of new principles, but a renewed relevance of existing ones.
We’ve compiled the principles that mattered more and more to investors as conditions changed.
While diversification is frequently discussed as a static portfolio attribute, it is inherently regime dependent in practice.
Assets that diversify effectively in liquid, low-volatility environments often exhibit materially different behavior when market conditions change. Relationships that once dampened risk can reverse, turning a diversifier into an unintended concentration source.
The past year reaffirmed a well-established principle: diversification requires continuous scrutiny of underlying return drivers, rather than reliance on labels, asset classes, or historical correlations.
Style classifications provide a useful framework, but they are insufficient substitutes for analyzing the exposures that ultimately determine portfolio behavior across regimes.
Markets tend to penalize fragility rather than volatility itself.
Several of the most consequential risks observed this year were structural in nature. Concentration, factor crowding, overlapping exposures all accumulated well before they were reflected in conventional risk measures you'd see on a dashboard. By the time volatility increased, these risks were already embedded within portfolios.
Periods of stress expose portfolios that depend on a narrow or static view of risk. When underlying assumptions fail, the resulting drawdowns can appear abrupt, despite being the outcome of gradual positioning decisions. The most effective way to prevent this is earlier visibility: regular review of factor exposures, concentration, and portfolio structure while conditions are still benign.
The increasing sophistication of portfolio tools has improved measurement, but not necessarily understanding. As we’ve seen repeatedly in our work with clients, precision is valuable only when accompanied by appropriate interpretation - and some years underscore this point more than others.
An excessive focus on optimization, parameter refinement, or point-in-time efficiency can obscure structural vulnerabilities. This year, a number of portfolios that appeared diversified in aggregate were, in effect, expressing similar growth- and liquidity-sensitive factors, which became visible soon enough.
Preventing this requires actively testing portfolios across alternative regimes and regularly reassessing factor exposures, rather than relying on optimizations calibrated to a single set of market conditions.
Portfolio drift typically develops incrementally rather than through discrete decisions. Small allocation changes, gradual factor shifts, and evolving market leadership all alter exposures over time.
During benign periods, these changes attract little attention. Under stressful conditions, their cumulative effect becomes dramatic.
The past year highlighted the importance of regular structural review as a means of maintaining alignment with the original investment thesis, rather than as a reaction to market moves.
Challenging markets do not change portfolios overnight. They test the discipline applied to portfolio construction and oversight over time - a reality investors may not want to hear, but one that consistently proves true. Stress reveals whether your exposures have been subject to regular review and explicit challenge, or whether they were allowed to accumulate as market conditions remained supportive.
Looking forward, competitive advantage is likely to depend less on portfolio construction in isolation and more on portfolio understanding. Labels will be secondary to exposures, and speed will be less valuable than the ability to articulate, justify, and adjust positioning as conditions evolve.
Market regimes will continue to change. Investors best positioned to navigate them will be those that assume regime change is inevitable, build portfolios with that expectation in mind, and maintain a clear, working understanding of what they own and why.
