Staying the Course in Unsteady Markets: A Guide for Long-Term Investors

Why Market Volatility Tests Investors

Periods of market turbulence are an inevitable part of investing. Sharp swings in equity and fixed income prices can prompt questions about whether a portfolio is still aligned with your goals. For many investors, the temptation is to make significant changes in response to short-term conditions, even when those moves may undermine long-term objectives.

Recognizing that volatility is a feature, not an anomaly, of investing helps put current conditions into context. Markets have experienced—and recovered from—wars, recessions, political changes, inflationary cycles, and unexpected crises. History shows that those who remain disciplined are better positioned to participate in the eventual recovery.

The Importance of a Defined Investment Policy

An investment policy statement (IPS) sets the framework for decision-making during volatile markets. It outlines your target allocations, acceptable ranges, rebalancing rules, and the process for making adjustments. With a clear policy, decisions are guided by predetermined principles rather than by emotion or headlines.

If you do not have an IPS, or if it has not been reviewed recently, consider this a priority. Markets evolve, and so do personal circumstances. A document that was appropriate five years ago may not reflect your current risk tolerance, income needs, or time horizon.

Maintaining Perspective During Sharp Declines

It is natural to feel concern when portfolio values fall, but perspective matters. Daily price movements rarely reflect the fundamental value of your investments. Corporate earnings, interest rate policies, and economic trends shape long-term performance more than short-lived episodes of volatility.

Reviewing past downturns can provide reassurance. The market decline of 2008–2009, the COVID-19 drawdown in early 2020, and other notable sell-offs were followed by recoveries that rewarded patient investors. While no two periods are identical, the resilience of markets over time remains a consistent pattern.

Rebalancing: A Tool for Discipline

Rebalancing—returning your portfolio to its intended asset allocation—serves both as a risk control measure and a method for buying low and selling high. During market downturns, equities may fall below their target weight, creating an opportunity to add exposure at lower valuations. Conversely, after strong equity gains, rebalancing may involve trimming stocks to prevent overexposure.

Establishing a schedule or threshold for rebalancing in advance helps avoid reactive trading. This process should account for transaction costs, tax implications, and available cash flows.

Evaluating Fixed Income and Cash Positions

Periods of equity volatility often highlight the role of bonds and cash in a portfolio. These assets provide stability and liquidity, helping meet income needs without forcing sales of depreciated equities.

In a rising interest rate environment, shorter-duration bonds may help manage price risk, while maintaining some exposure to intermediate or longer maturities can lock in higher yields for future income needs. Cash should be sufficient to cover near-term obligations but not so large that it erodes purchasing power over time.

Avoiding the Cost of Market Timing

Attempting to exit the market before a decline and re-enter at the bottom is challenging even for professional investors. Missing just a few of the strongest market days in a given period can meaningfully reduce long-term returns.

Rather than trying to predict short-term movements, a more reliable approach is to remain invested according to your plan, making gradual adjustments as personal circumstances or risk preferences change.

Working With a Professional During Uncertain Periods

An advisor’s role during volatile markets is both analytical and behavioral. By interpreting market data, identifying risks, and suggesting adjustments consistent with your plan, an advisor helps keep strategy aligned with objectives. Equally important, an advisor provides perspective, helping prevent decisions driven by fear or speculation.