One of the most uncomfortable moments in investing is discovering that assets you believed would behave differently are all falling together — and Toby Watson’s experience offers a grounded perspective on what to do about it.
Diversification is one of the foundational principles of portfolio construction, yet it has a habit of failing precisely when investors need it most. During periods of market stress, correlations between asset classes tend to rise, eroding the protection that diversification was supposed to provide. Understanding why this happens — and how to build portfolios that are more genuinely resilient — requires experience that goes beyond theory. Toby Watson, whose career spanned some of the most turbulent periods in modern financial markets, brings a practical and considered perspective to this enduring challenge.
Toby Watson is a Partner at Rampart Capital, an independent London-based investment office that provides bespoke investment management and advisory services to wealthy individuals and their families. His professional background includes close to 17 years at Goldman Sachs, where Toby Watson worked across structured credit trading, principal funding, and global infrastructure financing. That experience included navigating the 2008 financial crisis — one of the most significant stress events in modern market history — when correlation breakdowns affected portfolios across virtually every asset class. He subsequently served as Chairman of Excalibur Academies Trust for nearly eight years, stepping down in early 2026.
What Toby Watson’s Market Experience Reveals About Correlation Risk
The concept of correlation is central to modern portfolio theory. If assets move independently of one another, combining them reduces overall portfolio volatility without necessarily sacrificing return. The practical problem is that correlations are not stable — they shift over time, and they tend to shift in the worst possible direction during periods of market stress, rising sharply just when diversification is most needed.
Toby Watson’s years at Goldman Sachs, working through multiple market cycles including the 2008 crisis, gave him a direct understanding of how correlation breakdown plays out in practice. Assets that had appeared to offer genuine diversification — certain credit instruments, structured products, even some alternative strategies — moved in concert as liquidity evaporated and risk appetite collapsed. The theoretical diversification that portfolios appeared to contain proved far less robust than the historical data had suggested.
That experience is instructive not because 2008 was unique, but because it illustrated a pattern that recurs across different market environments. When fear dominates, investors sell what they can rather than what they should, and the distinctions between asset classes that matter in normal conditions tend to collapse under pressure. Toby Watson has noted that this pattern is one of the most reliable features of market stress — reliable, unfortunately, in a direction that damages portfolios.
Why do correlations rise during market stress — and what can investors do about it?
Correlation rises during stress events, largely because investor behaviour becomes dominated by a single factor: the desire to reduce risk and raise liquidity. When that impulse is widespread, it overwhelms the fundamental differences between asset classes, causing prices to move together regardless of their underlying characteristics. The experience Toby Watson gained at Goldman Sachs — working across structured credit and principal funding through periods of acute market dislocation — gives him a practical rather than merely theoretical understanding of this dynamic, and of why portfolio construction needs to account for it explicitly.
Building Portfolios That Hold Together Under Pressure
The challenge for investors is that historical correlation data provides an imperfect guide to how assets will behave in future stress scenarios. Correlations measured over long periods may look reassuringly low, while masking the tendency to spike at precisely the wrong moment. A portfolio that looks well diversified in normal conditions may offer considerably less protection when conditions deteriorate.
Addressing this requires thinking about diversification in terms of underlying risk factors rather than asset class labels. Two investments categorised differently may share common exposures to credit risk, liquidity risk, or economic sensitivity — and those shared exposures are what drive correlation in a stress event. The factor-based approach to portfolio construction that Rampart Capital employs is designed, in part, to identify and manage these underlying risk exposures more explicitly than a traditional asset class framework allows.
Toby Watson’s perspective is shaped by practical experience of seeing apparently diversified portfolios behave very differently from expectations when conditions change. It reflects a broader principle that Toby Watson brings to investment thinking: that understanding how a portfolio will behave under stress is at least as important as understanding how it will perform in benign conditions.
Practical Approaches to Managing Correlation Risk
There is no straightforward solution to the correlation problem. But there are approaches that tend to make portfolios more resilient, and Toby Watson’s background provides a useful frame for thinking about them.
The strategies that tend to reduce genuine correlation risk include:
- Diversifying across underlying risk factors rather than relying on asset class labels as a proxy for independence
- Including assets whose return drivers are genuinely uncorrelated with broad market sentiment — such as certain absolute return strategies or real assets with predictable cash flows
- Maintaining meaningful liquidity reserves so that stress-driven selling does not force liquidation of core positions at the worst possible time
- Stress-testing portfolios against scenarios in which correlations rise significantly, rather than relying solely on historical averages
The Limits of Traditional Diversification
One of the more uncomfortable lessons from periods of market stress is that traditional diversification — spreading capital across equities, bonds, and some alternatives — offers less protection than commonly assumed when all three are affected by the same underlying shock. The experience Toby Watson developed during his years at Goldman Sachs, working through periods when credit markets, equity markets, and structured products were all repricing simultaneously, highlighted the limits of strategies that do not account for common risk factor exposures. That does not mean diversification is without value — it means effective diversification requires more rigorous analysis than simply allocating across conventionally distinct categories.
The qualities that tend to characterise genuinely resilient portfolio construction include:
- A clear understanding of the underlying risk factors driving each investment, rather than reliance on category-level assumptions
- Explicit attention to liquidity across the portfolio, particularly where multiple asset classes may come under pressure simultaneously
- A willingness to accept lower expected returns from genuinely uncorrelated assets, recognising that their value lies in their behaviour under stress
- Ongoing reassessment of correlation assumptions as market conditions evolve, rather than treating historical data as a reliable guide
For investors serious about portfolio resilience, the breakdown of correlations in stress scenarios is not an edge case. It is a central feature of how financial markets work — and one that Toby Watson considers deserving of a central place in how portfolios are constructed and maintained.
