Market volatility is a normal part of investing. Share markets can rise and fall in response to economic conditions, interest rates, geopolitical events, company performance and investor sentiment.
While periods of falling markets can be unsettling, short-term market movements do not necessarily change the long-term purpose of your investment strategy.
For investors, one of the biggest challenges during uncertain periods can be resisting the temptation to make emotional decisions. Selling investments after markets have fallen may feel like a way to protect your wealth, but it can also mean missing the recovery that often follows periods of market weakness.
A disciplined, long-term investment strategy can help you navigate market volatility while keeping your investments aligned with your broader financial goals.
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What is market volatility?
Market volatility refers to the frequency and size of movements in investment prices over a period of time.
Markets can become more volatile when investors respond to economic uncertainty, changes in interest rates, political developments, global events or concerns about economic growth.
Volatility can be uncomfortable, particularly when you see the value of your investments falling. However, market fluctuations are a normal feature of investing and should be considered when developing a long-term investment strategy.
The important question is not necessarily whether markets will experience volatility, but whether your investment strategy is designed to accommodate it.
Why reacting to market movements can be risky
When markets fall, it can be tempting to sell investments and move your money into cash or other lower-risk assets.
The difficulty is that markets are unpredictable. It is extremely difficult to consistently identify the point at which markets have reached their lowest point or when the next recovery will begin.
Investors who move out of the market during a downturn may therefore miss some of the strongest days of a subsequent recovery.
This is one reason maintaining a long-term investment strategy can be important. Rather than trying to predict exactly what markets will do next, investors can focus on whether their portfolio remains appropriate for their financial goals, timeframe and tolerance for investment risk.
Staying invested through market cycles
Investment markets move through different cycles. Periods of growth can be followed by periods of decline, before markets recover and potentially move towards new highs.
This does not mean markets will always recover quickly, or that every investment will perform well. Different asset classes and investments carry different levels of risk.
However, attempting to time the market by repeatedly moving in and out of investments can make it harder to maintain a consistent strategy.
For long-term investors, staying focused on the overall investment timeframe can provide valuable perspective when short-term market movements create uncertainty.
Aligning your investments with your financial goals
Your investment strategy should be built around your financial goals, rather than simply what markets are doing today.
Consider how soon you will need to access your money, how much investment risk you are comfortable accepting and what you are trying to achieve with your investments.
For example:
- Short-term financial goals may require greater stability and lower-risk investments because there is less time to recover from a market decline.
- Medium-term goals may require a balance between growth potential and investment stability.
- Long-term goals can often accommodate greater market fluctuations because there is more time for investments to potentially recover from periods of weakness.
This is why the right investment strategy will not look the same for everyone.
Understanding the purpose of your investments can also make it easier to put short-term market movements into perspective.
The role of diversification
Diversification is another important consideration when managing investment risk.
A diversified portfolio spreads investments across different asset classes, sectors, industries, regions or types of investments. The objective is to avoid relying too heavily on the performance of a single investment or market.
Diversification does not eliminate investment risk or guarantee positive returns. However, it can help reduce the impact that poor performance from one particular investment or asset class may have on an overall portfolio.
Your appropriate level of diversification will depend on your circumstances, objectives, investment timeframe and risk tolerance.
Planning for life’s transitions
Financial planning often involves balancing today’s needs with tomorrow’s objectives.
Retirement, transitioning from the workforce, receiving a lump sum, changing your income or helping support family members can all influence how your investment strategy should be structured.
During these periods of change, it can be particularly important to review whether your investments remain aligned with your circumstances.
A strategy that was appropriate several years ago may no longer be suitable if your goals, timeframe, income or financial position have changed.
Regular financial planning can help identify when adjustments may be appropriate, rather than making decisions based solely on short-term market movements.
What should you do when markets are falling?
When markets become volatile, consider taking a step back before making significant investment decisions.
Ask yourself:
- Has my financial situation changed?
- Have my investment goals or timeframe changed?
- Is my current portfolio still appropriate for my risk tolerance?
- Am I reacting to my long-term financial plan or to today’s headlines?
If your circumstances and objectives have not changed, short-term market volatility may not necessarily require a major change to your investment strategy.
If your circumstances have changed, however, a review may be appropriate.
Staying focused on the long term
Successful long-term investing is rarely about predicting what markets will do next.
Instead, it is about having an investment strategy that reflects your goals, timeframe and tolerance for risk, maintaining appropriate diversification and making considered decisions when circumstances change.
Market volatility can feel uncomfortable, but it is important to remember that investment markets are inherently uncertain.
A clear financial plan can help provide direction during these periods and reduce the temptation to make emotional decisions based on short-term market movements.
The goal is not to predict every market movement. It is to have a strategy that keeps you moving towards your financial goals, even when markets become uncertain.
If you are unsure whether your current investment strategy remains appropriate for your circumstances, speaking with a qualified financial adviser can help you understand your options and make informed decisions.
General information only. The information provided does not take into account your objectives, financial situation or needs. You should consider whether the information is appropriate for you and seek professional advice before making investment decisions.
Frequently Asked Questions
What is market volatility?
Market volatility refers to how frequently and significantly investment prices move over a period of time. Volatility can increase due to factors such as economic conditions, interest rates, geopolitical events and investor sentiment.
Should I sell my investments when markets fall?
Selling during a market downturn may lock in losses and could mean missing a subsequent market recovery. Whether you should make changes to your investments depends on your individual circumstances, goals, timeframe and risk tolerance.
How can I manage investments during market volatility?
Maintaining a diversified portfolio, focusing on your long-term goals and regularly reviewing whether your investment strategy remains appropriate can help you navigate periods of market volatility.
Why is diversification important when investing?
Diversification spreads investments across different asset classes, investments, sectors or regions. While it cannot eliminate investment risk, it can reduce reliance on the performance of any single investment or market.
How does my investment timeframe affect my strategy?
Your investment timeframe can influence how much market volatility you may be able to tolerate. Short-term goals generally require greater stability, while longer-term goals may have more capacity to withstand short-term market fluctuations.
Should I review my investment strategy during a market downturn?
A market downturn does not automatically mean your investment strategy needs to change. However, if your financial circumstances, goals, investment timeframe or tolerance for risk have changed, it may be appropriate to review your strategy with a financial adviser.