The US stock market’s concentration in a few richly valued stocks has raised concerns that the stock market may tumble. While we agree that the overall market could decline sharply, a number of factors suggest that balanced well-diversified portfolios will out perform the US stock market.
Morningstar recently posted an article[1] examining US stock market declines during the past 150 years. They found 19 periods where the US stock market declined by 20% or more, an average of one selloff every 8 years. The average time required for the market to fall more than 20% from a record high and rebound to set a new record was 51 months or 4 ¼ years. The key takeaways are that selloffs are not unusual and recoveries, on average, take place over a time frame that is short compared to an investing horizon of 20 years or more.
Of course, the timing of a selloff matters. The implications for someone in or near retirement are much greater than for someone that is decades away from retirement. A need/desire for stability typically results in retirees having a lower level of stock market exposure than workers that are decades away from retirement. Another Morningstar article[2] demonstrates the increased stability provided by adding bond exposure to a portfolio. Over the same 150 year period covered by the US stock market article, they found only 11 periods where a 60/40 portfolio of US stocks/bonds declined by 20% or more. Further, in each of these 11 periods the peak decline in the value of the 60/40 portfolio was smaller than the decline in the US stock market.
Complementing the risk reduction provided by bond exposure, managers can also take steps to diversify within a stock portfolio. In the present environment, maintaining a 50/50 balance between growth and value exposure is expected to benefit performance in a selloff as the market is overweight growth and growth stocks appear most likely to lead the market lower if a selloff occurs. A strong valuation discipline, i.e. a focus on buying stocks that are undervalued and selling those that are overvalued, is also expected to benefit performance in a selloff given the rich valuations of current market leaders.
If you have any questions or concerns about your current portfolio, please reach out to Arbor Financial today.
This note has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates and opinions included in this report constitute our best judgment as of this date and may be subject to change. Past Performance is not a guarantee of future results. In fact, several studies suggest there is little or no correlation between past performance of specific investments and their future results.
[1] www.morningstar.com/economy, “What We’ve Learned From 150 Years of Stock Market Crashes”, Emelia Fredlick, December 2, 2025.
[2] www.morningstar.com/economy, “The 60/40 Portfolio: A 150-Year Markets Stress Test”, Emelia Fredlick, December 2, 2025.
Peter has more than 25 years of experience in the financial industry as a researcher, strategist, and portfolio manager. As a portfolio manager at Arbor, Peter performs quantitative analysis on current and prospective portfolios.
Peter is a CFA charter holder. He earned his PhD in Economics as well as dual Bachelors of Science degrees in Computer Science and Pure Mathematics from the University of California, Santa Barbara.
Before joining Arbor, Peter was a Founding Member of institutional money manager OakBrook Investments and worked there for 22 years serving in a variety of roles including portfolio manager, Director of Research, and co-Chief Investment Officer. Prior to forming OakBrook, Peter worked at ANB Investment Management & Trust Company as a strategist, portfolio manager, and Head of Research.
Peter has lived in Lisle, Illinois since 1997. Outside of work he enjoys sports car racing and is an active member of the Autobahn Country Club in Joliet, Illinois and the Sports Car Club America (SCCA).