What do market swings really mean for your portfolio?
Few investing topics attract more attention than market volatility. It has accompanied every stage of modern investing history and is likely to remain a feature of financial markets in the future.
While uncertainty can be unsettling, it’s a normal part of investing rather than an indication that something has gone wrong.
Sharp swings in asset prices tend to dominate headlines and fuel predictions about what might happen next. For investors, that constant flow of information can make those periods feel far more significant than they appear with the benefit of hindsight.
Turbulence is normal
Periods of volatility have remained a consistent feature of investing for decades. Equity markets have experienced major corrections and global disruptions alongside countless shorter periods of uncertainty. While the value of investments can go down as well as up over time meaning you could get back less than you invested, major indices have historically gone on to recover from these downturns.
Asset prices move in response to new information. Economic data, interest rate expectations, company earnings, government policy decisions and geopolitical developments can all influence how investments are valued.
When information changes quickly, prices follow. Periods of uncertainty are often simply a reflection of that process.
Why volatility can feel so significant
Market movements are easy to measure but hard to ignore. Investors have access to more information than ever before, with financial news, market commentary and portfolio valuations available around the clock.
When market developments are receiving widespread attention, the flow of information can create a sense of urgency. A sense of needing to cut losses can overshadow long-term thinking.
These short-term movements often feel important at the time, when they are actually only a short chapter within a much longer investment journey.
Exposing strengths and weaknesses
These volatile periods have a hidden benefit. Valuations come into sharper focus, market inefficiencies are exposed and investors are prompted to reassess.
This means holdings that have not been reviewed for some time can also attract attention, bringing to light ‘dead wood’ that no longer serves the overall objective.
Certain assets or sectors may have grown to represent a larger proportion of a portfolio than originally intended. Diversification, concentration risk and asset allocation are often reconsidered.
The common thread is to ensure all holdings support the overall objectives of the portfolio, which is typically done with a long-term view.
Staying the course
Investment strategies are generally built around long-term objectives, time horizons and an agreed level of risk. Volatility puts the integrity of those foundations to the test.
A disciplined rather than reactive approach helps maintain consistency between your portfolio and its intended purpose. Even the most experienced investors struggle to accurately time the market and identify true bottoms, meaning decisions should be made with special care during turbulent periods.
Acting on short-term market movements can lock in losses and make it harder to participate in any subsequent recovery. Selling after markets have fallen can also mean missing the early stages of a rebound, when some of the strongest returns have historically been generated.
Rebalancing and portfolio maintenance
A period of strong performance in one area of the market can increase its weighting within a portfolio, potentially changing the overall level of risk. Equally, weaker-performing assets may become underrepresented relative to the original strategy.
Rebalancing is the process of reviewing those allocations and making adjustments where appropriate to bring the portfolio back in line with its goals. Done consistently, it helps maintain the risk profile and investment approach originally agreed upon. While rebalancing protects the intended structure, it is important to remember that all investments carry risk, values can fluctuate and you may not get back the full amount originally invested.
If you would like to review your portfolio or discuss whether your current investment strategy remains aligned with your long-term objectives, you can book a 30-minute, no-obligation conversation with Practice Principal Alex Wilkins.
