Few things test an investor’s resolve quite like a sharp market sell-off. When geopolitical uncertainty is high and markets are responding rapidly to every new development, the temptation to act can be difficult to resist. Yet successful long-term investing is rarely about reacting to the latest headline. It is about having a resilient, diversified portfolio in place and the discipline to stay focused on long-term objectives while remaining alert to opportunities created by volatility.
How to think about volatility
Volatility is a natural feature of financial markets, particularly during periods of geopolitical upheavals. Prices can move rapidly as investors respond to changing news and reassess the potential implications for economies, sectors, companies and markets.
While seeing the value of a portfolio fall is uncomfortable, periods of weakness don’t necessarily represent a crisis for long-term investors. They can also create opportunities to buy shares in high-quality businesses at more attractive prices.
Warren Buffett’s well-known advice to be ‘greedy when others are fearful’ captures this idea. When fear drives share prices lower, investors who are able to look beyond the immediate uncertainty may have an opportunity to acquire good businesses at valuations that were not available when markets were more optimistic.
Taking advantage of these opportunities, however, requires preparation. Portfolios need to be positioned to withstand downside shocks before they happen. This is why we typically construct client portfolios with a defensive tilt during more normal market conditions. Building resilience into a portfolio in advance can provide greater flexibility when volatility rises, creating capacity to take advantage of lower prices.
Discipline over timing
One of the greatest temptations during volatile periods is to try to avoid further losses by moving out of the market and waiting for conditions to improve. The difficulty is that this requires investors to make two successful decisions: when to sell and, just as importantly, when to buy back in.
Markets are inherently unpredictable, and nobody can consistently identify their highs and lows. This is the thinking behind the familiar investment principle that time in the market is more important than timing the market.
Long-term wealth creation depends far more on sticking to a sound investment strategy, managing risk and avoiding emotional decisions. Market downturns can test that discipline, particularly when negative news dominates headlines and there appears to be little immediate prospect of improvement. Yet abandoning a long-term strategy in response to short-term events can crystallise losses and leave investors on the sidelines when markets recover.
Discipline also allows investors to use periods of market weakness constructively. Rather than reacting to falling prices, they can rebalance portfolios where appropriate and take advantage of opportunities that emerge. Timing the market may occasionally produce a fortunate result, but consistency, resilience and the ability to benefit from compounding over time are far more important to sustainable investment success.
Diversification provides protection
Diversification is another important defence against market uncertainty. Spreading investments across different asset classes, sectors and geographic regions reduces reliance on any single source of return and limits the damage that poor performance in one part of a portfolio can cause.
This becomes particularly valuable when markets are unsettled. Different investments do not necessarily respond to economic or geopolitical events in the same way or at the same time. Weakness in one area may therefore be offset, at least partly, by greater resilience elsewhere.
Diversification can’t eliminate volatility or prevent a portfolio from falling in value. What it can do is help cushion market drawdowns and provide a more consistent return profile over time. This has another important benefit: a portfolio that is less exposed to extreme movements can make it easier for investors to remain disciplined and avoid poorly timed decisions driven by fear.
In this sense, diversification is not simply about spreading risk. It supports the broader investment strategy by helping ensure that a setback in one area doesn’t derail an investor’s long-term financial objectives.
Staying focused on the long term
Periods of uncertainty are inevitable, and the events that trigger them will differ from one market cycle to the next. What remains constant is the importance of preparing for volatility before it arrives.
Market volatility may be uncomfortable, but for long-term investors it need not be something to fear. With the right portfolio and investment approach already in place, periods of uncertainty can be managed calmly and often turned to the advantage of investors with the ‘stomach’ to act with a long-term mindset.
