Portfolio management in volatile markets

When markets are volatile, it's sometimes hard to remain level-headed. Extreme fluctuations can sometimes cause you to make hasty, rash decisions. Here are 6 tips to help you maintain your strategy when markets become uncertain.

01. Don't take impulsive action

If the share prices of your equities fall significantly, it may be tempting to sell your holdings, for fear that their prices fall still further. While this reasoning may seem intuitive under pressure, it also proves to be the sure way to crystallise a loss.

Sometimes, it's more worthwhile to be patient, to let the market stabilise and see the share prices rise again. Drops in valuations occur almost every year. In the absence of a drastic deterioration in the economic and political context, inaction can often be the best decision. Keep your initial strategy in mind and don't make hasty decisions.

02. Maintain a diversified portfolio

Portfolio's diversification is the best defense against market turbulence. You need to ensure that your portfolio represents a mix between different types of financial instruments (equities, bonds, funds, cash), but also between different sectors (finance, healthcare, retail, infrastructure, technology,...) and different geographical areas (America, Asia, Europe), for example.

There is no single asset class, industry sector or country that will consistently outperform the others. Consider investing in different sectors that don't show significant correlations with each other. This will reduce your portfolio's volatility and you’ll benefit in the long term.

03. Focus on a long-term vision

Any seasoned investor knows, markets are cyclical, and are by definition subject to fluctuations. Any downturn you may experience at a given moment in time will certainly not be the last. However, it's important to remember that, over the long term, markets have an upward trend. Situations where the market falls significantly tend to last much less time than periods of growth. When markets are unstable and falling sharply, it often seems that the best option is to ride out the storm. It would be a shame to divest before prices recover.

This chart clearly shows that falling markets (kno0wn as bear markets) have historically been shorter and less significant than rising (or bull) markets. (Source)

04. Invest again

It may seem counterintuitive, but sometimes a falling market represents a great buying opportunity. By definition, a lower purchase price will simply have a positive effect on the potential return on investment. Of course, it's impossible to determine the lowest point of a falling market. However, regardless of the precise time of purchase, history shows that buying during a bear market had a positive impact on long-term investment returns.

05. Invest in so-called " defensive " assets

Defensive securities, such as cash and bonds, offer relatively stable returns over the long term with lower volatility. They represent a good alternative in volatile periods and generally help stabilise your portfolio. Their stability is all the more attractive if you plan to use your assets for an imminent property purchase, or to finance your retirement.

06. Consider adjusting your portfolio

During periods of high fluctuations on the stock markets, whether rising or falling, your portfolio may sometimes vary from your initial allocation. The share of equities may increase or decrease. This requires the readjustment of your allocation by selling or buying shares, in order to return to your initial strategy.

This mechanism can be quite attractive. Imagine you have a planned allocation of 60% in equities. For example, if the previous year the value of the equity market had risen so much that you found yourself with an allocation that represented 75% of your portfolio, you would need to sell shares, and thus take profits after the rise. By the same logic, if after a stock market downturn your allocation falls to 50%, you'll need to buy more shares, and at a lower price.

This strategy will therefore lead you to sell stocks that are rising in value and buy those that have fallen, i.e. to buy at a low price in order to sell at a high price. Although it doesn't guarantee against temporary losses, this strategy makes a lot of sense over the medium to long term.

Conclusion

Historically, markets have always fluctuated. After a sharp fall, it's often too late to sell. Wise investors know, moreover, that it's rarely advisable to succumb to panic. After all, any financial crisis, no matter how dire, always comes to an end. What's more, given the long-term upward trend of the markets, all downturns and crises are followed by upturns and, after a few months or years, new price records. As history shows, volatile markets are not to be feared, and are often a source of opportunity. So it's all about knowing how to navigate through these difficult periods, in order to mitigate potential losses and maximize your long-term gains.

Our team of experts will be happy to advise you on the best position to take during a difficult market situation, whatever your investment profile.