Positioning Your Portfolio in Turbulent Times

All investment markets experience cycles of growth and decline. Regardless of your level of investing experience, market volatility can cause anxiety, often leading to impulsive decision-making that may negatively impact long-term financial goals. Given that market fluctuations are inevitable, even if their timing is unpredictable, how can investors position their portfolios to withstand uncertainty and emerge stronger?

Understanding Your Investment Objective

Before making any adjustments to a portfolio, it is important to revisit the investment objectives. Are you focused on long-term wealth accumulation, or is it capital preservation and income generation your primary goal? Your risk tolerance plays an important role in this equation. How would you react if your portfolio declined by 20% or more? Would you feel uncomfortable and sell off growth assets, or would you see it as an opportunity to invest in quality assets at a lower price?

Clarifying your investment goals and risk appetite helps establish a strong foundation for effective portfolio positioning. Once this is defined, you can turn your attention to asset allocation which is the strategic division of your investments across different asset classes such as cash, fixed income, property, and equities. Some investors also consider alternative asset classes like commodities (eg. gold) and absolute return funds, which aim to generate positive returns in both rising and falling markets.

The Power of Asset Allocation

Asset allocation acts as the engine for your portfolio. It has a more significant impact on overall performance than individual investment selection. Properly diversifying your portfolio across asset classes helps to mitigate risk, as different assets react differently to economic changes.

For example, equities generally offer higher potential returns but come with increased volatility and risk, while fixed income investments provide stability and predictable stable returns. Property investments can offer capital growth and rental income, and commodities like gold aim to act as a hedge against inflation and market downturns. A well-balanced asset allocation tailored to your financial goals and risk tolerance can provide resilience during uncertain times.

The Role of Diversification

Diversification is one of the most effective tools for risk management. By spreading investments across different asset classes, industries, and geographic regions, you can reduce exposure to a single point of failure. For example, a portfolio concentrated in just technology stocks may experience extreme volatility, whereas a diversified portfolio containing banks, consumer goods, healthcare, infrastructure, mining, fixed income, and property provides greater stability.

International diversification is also important to mitigate local economic downturns. While one country’s economy may struggle, another may thrive, balancing overall returns. Rebalancing your portfolio periodically ensures that it remains aligned with your original investment strategy, even as market conditions change.

Adjusting Your Portfolio: Proactive vs. Reactive Strategies

Many investors often consider whether they should make tactical adjustments or stay the course during volatile times. A proactive approach involves structuring your portfolio with long-term resilience in mind, ensuring appropriate diversification, and maintaining liquidity. A reactive approach, on the other hand, may involve selling assets during market downturns, which can lead to missed recovery opportunities.

Studies show that long-term investors who stay committed to their strategy tend to outperform those who attempt to time the market. Market research also outlines that missing the best 10 days in the stock market over a 20-year period can drastically reduce returns. Therefore, making rash decisions based on short-term market movement can be detrimental to long-term financial success.

Weathering Market Storms

Market downturns often trigger fear-based reactions. However, history demonstrates that markets recover from declines. Consider the global financial crisis of 2008 or the Covid-19 market crash in 2020. These events showed that while stock markets plunged, those who held their investments saw rebounds in the following months and years.

Managing Emotional Bias and Market Timing

One of the biggest risks during market turbulence is emotional investing. Panic-driven decisions, such as selling assets as a loss during downturns or jumping into investments during market peaks, can erode wealth over time. Studies have shown that investors who react emotionally to market swings often underperform compared to those who maintain a disciplined, long-term approach.

Professional investors and financial advisors use data backed strategies rather than emotions to make investment decisions. By consulting with a financial expert, investors can gain a clear, objective perspective on their portfolios and avoid common pitfalls associated with emotional investing.

The Value of Professional Guidance

Navigating market turbulence requires a combination of discipline, knowledge, strategic planning, and patience. Seeking professional financial advice can provide a detached, impartial assessment of your portfolio and help you refine your strategy based on your risk tolerance and long-term objectives.

A financial planner can assist in reviewing your asset allocation, identifying diversification opportunities, and ensuring that your investment strategy remains aligned with your financial goals. In times of uncertainty, professional guidance can offer clarity and reassurance.

Frequently Asked Questions (FAQs)

1) Should I sell my investments during a market downturn and then invest again once the market has bottomed?

Timing the market is a very difficult process when investing and even the most experienced investment managers would be unable to determine the perfect time to re-enter the market. The other common problem that arises with this strategy is we find that once investors sell down, they tend to hold their cash for too long, expecting the market to continue to decline and often miss the rebound in the market.

2) How can I reduce risk in my portfolio during volatile periods?

Risk can be managed through diversification, asset allocation, and periodic portfolio rebalancing. Whilst these can help manage risk, it does not remove all risk from a portfolio and the impact from a volatile market may still be felt.

3) What role does cash play in a portfolio during uncertain times?

Cash provides liquidity and flexibility, allowing investors to take advantage of opportunities when asset prices decline. It also acts as a buffer against volatility. For those in retirement, it can allow the portfolio to continue to meet income obligations.

Final Thoughts

Market turbulence is a normal part of investing, and it doesn’t have to derail your financial journey. By maintaining a disciplined, well-diversified investment approach and focusing on long-term objectives, you can navigate volatility with confidence.

Avoiding emotional decision-making, staying informed, and seeking professional guidance can help ensure that short-term fluctuations do not compromise your long-term financial success.

About Us

After working as an advisor for a decade, Joel founded Unified Wealth.

Unified Wealth specialises in helping clients who are facing life’s big decisions.

Whether you’re contemplating your first property, growing your family or starting your investment journey we can help you focus on the simple steps to help you make your goals reality.

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