Making portfolio decisions in times of market volatility
Periods of market volatility can test even the most seasoned investor. It’s natural to feel unsettled when portfolio values drop and headlines turn gloomy. But at times like these, investment considerations during a market downturn become especially important.
A steady hand and a clear long-term perspective can help investors navigate uncertainty and avoid decisions they may later regret.
Whether you’re a new investor or reviewing a long-standing portfolio, taking a calm and informed approach during challenging periods can make all the difference to long-term outcomes.
What you will learn
- Why staying invested during market downturns can support long-term outcomes
- How diversification helps manage risk across different market conditions
- The role of defensive assets and cash in building portfolio resilience
- Common emotional pitfalls investors face in volatile markets
- The key investment considerations during a market downturn
1: The importance of staying the course
The past reveals that market downturns are not just common, they’re temporary. The most successful investors are those who remain invested through the full market cycle, not those who try to time exits and entries. Selling during a downturn locks in losses. Staying invested allows your portfolio to participate in the recovery that typically follows.
In fact, as seen during the 2008 financial crisis and the COVID-19 crash, markets can rebound sharply and unexpectedly. Investors who stayed put were rewarded for their patience, while many who sold missed the recovery altogether.
2: The value of a diversified portfolio
Most retail investors should invest in diversified portfolios, designed specifically to manage risk across market conditions. These portfolios include a blend of equities, bonds, cash-like holdings and commodities. Furthermore, gaining knowledge of the most tax-efficient investments will serve you well.
This diversification is key. It means that whilst some areas may be vulnerable to a market downturn, other areas could benefit, helping to cushion overall portfolio performance. There should be no reason for you to make changes when armed with a portfolio built to weather the storm.
3: The role of defensive assets and cash reserves
Some parts of a portfolio may naturally offer more stability. Government bonds and commodities like gold often perform well when equities are struggling. Cash and cash equivalents, though not growth engines, provide stability, liquidity and opportunities for further investment. These elements are already embedded in most investors’ portfolios by design to provide resilience during uncertainty.
4: Resist the urge to act on emotion
Market downturns often lead to a flood of dramatic headlines, social media speculation, and peer commentary. While it’s tempting to “do something,” this is rarely in the investor’s best interest. Knee-jerk decisions rarely pay off. Studies show that missing just a handful of the best-performing market days can significantly reduce long-term returns.
If changes are made to an investment portfolio, they should be made by the portfolio manager. Changes may also be necessary if driven by personal circumstances or long-term planning. They should not be driven by short-term sentiment.
5: Stay focused on the long term
The real goal of investing is not short-term performance, but achieving long-term results such as funding retirement, education, or leaving a legacy. If leaving a legacy is front of mind, now may be a good time to start looking at the different ways to avoid inheritance tax.
Downturns, while uncomfortable, are part of that journey. Long-term investors understand that these periods offer perspective, reinforce the importance of diversification, pass with time and offer opportunity.
Investment considerations during a market downturn – conclusion
Market downturns are never easy, but they are a natural and expected part of the investment journey. The most resilient investors are those who remain focused on long-term goals, rely on well-structured portfolios, and resist the temptation to respond emotionally to short-term events.
Factors to consider
If this article on the key investment considerations during a market downturn has given you food for thought, here are some more questions to consider.
- Is your portfolio diversified enough to handle market uncertainty?
- Are your investment decisions guided by goals or short-term emotion?
- Do you understand the purpose of each asset in your portfolio?
- Are you giving your investments time to recover and grow?
- Would a review of your long-term strategy help reinforce your confidence?
Frequently asked questions
Keen to learn more about the different investment considerations in a marketing downturn?
Read our selection of FAQs.
Should I make changes to my portfolio during a market downturn?
Not necessarily. If you’re already invested in a well-diversified portfolio aligned with your long-term goals, staying the course is often the most effective strategy. Making changes based on short-term volatility can do more harm than good and risks missing the eventual recovery that often follows downturns.
What are the key investment considerations during a market downturn?
Key investment considerations during a market downturn include staying invested, avoiding emotional decisions, and ensuring your portfolio is properly diversified. Understanding how different assets behave in volatile markets can help you remain focused on long-term outcomes and resist the urge to react to short-term noise.
How does diversification help in a downturn?
Diversification spreads your investment risk across different asset types, sectors, and regions. This means that while some parts of your portfolio may fall during a downturn, others may remain stable or even rise, helping to reduce the overall impact on your portfolio and support a more stable investment journey.
Is cash a safe place to be during market volatility?
Cash may feel like a safe haven, but it rarely keeps up with inflation over the long term. While it adds stability and liquidity, holding too much cash for too long can erode purchasing power. A balanced portfolio usually includes some cash alongside growth-oriented and defensive assets.
What can I do to feel more confident in my investments?
Start by reviewing your goals, understanding your portfolio’s structure, and making sure it’s built to handle market shifts. Knowing that your investments are aligned with a strategy can offer reassurance. During uncertain periods, reviewing the core investment considerations during a market downturn can reinforce your confidence.
