Discover the framework designed to help keep you invested through uncertainty and protect what you’ve built
The Bottom Line:
- Should I change my portfolio allocation after a market run? Only if your financial plan has changed materially. Otherwise, we typically use rebalancing to de-risk appropriately.
- What is Waddell & Associate’s “red button” hedge strategy? A prepared emergency allocation we can employ that may help reduce risk exposure if a recession appears imminent, helping limit major downturns.
- Why focus on financial plan probability instead of returns? Because what matters most isn’t stock market performance; it’s whether your life plans stay on track.
The Full Story:
I know what many of you are thinking as we close out another year of record market highs: This feels a little unsettling. Should we be doing something?
We’ve hit so many new highs this year that I’ve honestly lost count. And anytime we get a run like this, the same questions surface: Is this a bubble? Should we de-risk? Are we being smart or are we just lucky?
That gut reaction is completely normal. It’s also not a particularly good reason to change your portfolio allocation.
As a client of W&A, your asset allocation was built around your financial plan. If nothing material has changed in your life (you haven’t retired early, sold your business, or are suddenly sending three kids to college next year), then there’s likely no real reason to overhaul your long-term investment strategy.
So, what do we do about it? How do we acknowledge legitimate concerns without making emotional decisions we’ll regret later? We have a framework for exactly this situation, and I want to walk you through it.
Watching the Right Scoreboard
Many people watch the stock market like it’s a scoreboard for their entire financial life. When it’s up, they feel great. When it’s down, anxiety sets in.
But the stock market isn’t your “scoreboard.” Your real benchmark for success is the probability that your financial plan “works” across different scenarios.
Every financial plan we build already contemplates market declines. For example, if you have about a third of your total net worth invested in stocks, and the market suddenly drops 10%, your overall wealth likely dips just 3%. That’s not comfortable, but it’s also not catastrophic. And frankly, it’s exactly what a well-built plan was designed to handle. This is why we keep coming back to your plan—not to be repetitive, but because it’s the one thing you can control.
Related: Why Financial Plans (Not Market Headlines) Should Drive Asset Allocation
Managing Risk in 2026: Three Levers We Can Pull (and When We Pull Them)
As we head into 2026, it’s natural to feel a mix of optimism and unease. The markets have delivered another remarkable run, one that feels both exciting and worthy of thoughtful attention.
At Waddell & Associates, our portfolio allocation strategy for 2026 is designed around discipline, not prediction. We don’t chase trends or react to headlines. Instead, we rely on a clear framework with three built-in levers we can pull when conditions warrant. Each one helps protect your long-term plan while keeping you meaningfully invested.
Lever One: Rebalancing
In a strong market (like the one we’ve seen through 2025), stocks often outpace everything else, which means your portfolio can quietly become riskier than intended. You might start the year with 60% in stocks but end up with 70% just because equities have climbed so much. That extra 10% may not sound like much, but it can significantly increase volatility when the market turns. That’s when we turn to Lever One: rebalancing.
Rebalancing is a quiet form of risk management that we do at set intervals and whenever markets move significantly enough to shift allocations beyond tolerance bands. It forces us to “sell high” on what’s overextended and “buy low” where opportunity remains. As we head into 2026, that means we’ll likely be trimming gains from equities and redeploying into underweighted areas like bonds or alternatives.
What is Rebalancing?
Rebalancing is the process of realigning your portfolio back to its intended mix of assets (stocks, bonds, and other investments). When one part of the portfolio grows faster than others, we trim it back and reinvest in areas that have lagged.
Lever Two: Shifting Within Your Stock Portfolio
Sometimes the right move isn’t to reduce your overall stock exposure but to adjust where that exposure lives. Within equities, we can move between sectors, regions, or company sizes to position the portfolio for the environment ahead.
After a long bull market, certain areas (like the so-called “Magnificent Seven” tech giants) can become crowded and expensive. At the same time, other parts of the market may offer better balance and long-term opportunity. That’s why we’re staying bullish but cautious by leaning more toward value and quality.*
By shifting within equities, we’re not trying to time the market; we’re simply helping to ensure your portfolio isn’t overexposed to sectors that have already had an extraordinary run.
Heading into 2026, we’re paying close attention to earnings trends, interest rate paths, and valuation spreads between sectors. If we see signs that leadership is broadening or that defensive characteristics are being rewarded, we can gradually adjust further toward more insulated parts of the market.
Lever Three: The “Red Button” Hedge
The best time to prepare for market stress is before it happens. By having a clearly defined hedge strategy in place, we can move decisively if conditions warrant, without scrambling or reacting emotionally.
Our “red button” hedge is a pre-defined, evidence-based allocation designed to protect client portfolios only if forward indicators signal a genuine recessionary threat. Our portfolios are designed to reduce equity exposure by up to 40% if conditions warrant.**
We only consider the red button when key recession indicators align, as only recessionary markets provide enough durable downside risk to justify hedging. It’s not about what we feel the market might do; it’s about what the data says. Heading into the new year, that readiness is what allows you to stay invested through uncertainty with confidence.
What This Means as We Head Into 2026
In a historic bull market, it’s natural to want to actively manage what’s working. But the truth is, thoughtful portfolio management isn’t about reacting to every move the market makes. It’s about knowing which moves matter, and when to make them.
Our three levers—rebalancing, shifting within equities, and the red button—exist so you can stay focused on what actually matters: the probability your plan succeeds. As we move into 2026, that remains our true scoreboard.
Related: The Strategic Questions Every Sophisticated Investor Should Ask Right Now
What if You Have an Especially Complex Portfolio?
If your balance sheet includes company stock, rental properties, or private business interests, you might be wondering if this framework applies to you. Short answer: it absolutely does, we just look at the whole picture first.
Complex portfolios often look diversified but can be heavily correlated in downturns. By coordinating across all accounts (personal, business, and trust), we manage to your plan’s overall probability of success.
Our three levers still apply here:
- Rebalancing keeps your total exposure in check, not just your portfolio weights.
- Shifting within equities helps offset risks tied to your industry or business.
- The “red button” hedge protects both personal and business liquidity if recession risk rises.
Our 2026 approach starts by viewing your whole balance sheet as one ecosystem, so we can manage risk across all parts of your wealth, not just your market holdings.
If your company stock or private business already carries growth risk, for instance, we might balance that with more stable, liquid assets. If real estate is a major holding, we might dial back cyclical or income-sensitive investments. The goal is to ensure no single area dominates your financial future.
Starting 2026 With Clarity
Successful portfolio allocation isn’t about reacting to what’s loudest. It’s about staying aligned to what’s lasting. The markets will shift, leadership will rotate, and volatility will return. Through it all, the constant is your plan and the discipline behind it.
The truth is, no two clients enter 2026 from the same place. Some of you are thinking about succession planning. Others are watching interest rates or considering a business exit. Whatever’s on your radar, we’d love to hear about it.
If anything in this conversation raised new questions about your portfolio or you’re anticipating any upcoming life changes in the new year, let’s connect. Even small updates can shift how your plan or allocation should evolve heading into 2026.
And if you’re not yet working with our team and are looking for a wealth partner who blends data-driven discipline with deeply personal planning, we invite you to learn more about the W&A difference. Our approach helps clients face markets like this one with clarity, confidence, and a plan built to last.
*These observations are for illustrative purposes and not intended as specific sector or security recommendations.
**The “red button” hedge is not a guarantee against loss, but a disciplined framework that may be activated if economic data signals elevated risk.
This content is for informational and educational purposes only and should not be construed as investment, legal, or tax advice. Waddell & Associates, Inc. is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.
The strategies and examples discussed are illustrative only and may not be appropriate for every individual. All investments and planning decisions involve risk, including the possible loss of principal.
Please consult your financial advisor, attorney, or tax professional before making any decisions related to retirement, estate, or healthcare planning.
