People’s livelihoods in the villages of the mountain region of Nepal are based on agro-pastoral system, and such livelihoods are stressful. Most studies carried out on livelihoods in Nepal have analyzed the status of capital assets, but they have grossly overlooked the equally important aspect of shocks and stress on sustainable livelihoods. This paper highlights the diversification in the livelihoods of mountain people in the midst of consistent stresses and shocks that result from both natural and social factors plus familial incidents. The study is based on case material from two settlements namely Phalyak and Dhakarjong of Kagbeni VDC of Mustang district. Necessary socioeconomic data were collected from 50 households of the settlements. Apart from household surveys, information has been collected from key informant interviews, informal discussions and field observation carried out several times between 2013 and 2015. Findings suggest that households in these settlements amidst shocks and stresses have diversified their livelihood options from being primarily dominated by agriculture and livestock raising in the past to apple farming (cash income), vegetable farming, external migration and tourism based activities. Despite isolation in the past, people are now becoming more linked with external world through their changing economic efforts. As a result, their current livelihood pattern shows that they are not only aware of external world but that they are trying to strike a balance between continuation of customary livelihood and cashing the new opportunities generated by recent development adventures in the area.