Investors who stay invested and diversify effectively are better placed to benefit from recoveries
While staying invested through volatility is often the smartest long-term move, that doesn’t always mean doing nothing, say experts from global wealth management firm Janus Henderson.
In a newly published guide to navigating market volatility, they show how strategically managing around a market decline can help cushion the ride and make it easier to stay the course.
“Markets rise and fall, often without warning, and those swings can feel unsettling – even though they’re perfectly normal. Every downturn can feel like this time is different, but history reminds us that, despite inevitable dips, markets have grown over time,” affirmed Matthew Bullock, EMEA Head of Portfolio Construction and Strategy.
Market corrections
Market corrections, defined as a drawdown of 10% or more, have occurred frequently in modern times. There have been 56 periods since 1928 when the market has declined by 10% or more.
Bear markets, which are defined by a drop of 20% or more, have occurred about once every 4.3 years. Put another way, if you invest over a 5-year period, it’s likely you will experience at least one bear market.
“That’s why attempting to time investment decisions around market dips can lead to missing out on the recovery,” asserted Mario Aguilar De Irmay, Senior Portfolio Strategist.
Market drawdowns
So, how should investors think about market drawdowns? Understanding what happens during a market decline is only half the picture; what happens after can be just as important, say the experts.
First, investors should consider equity sector diversification as various parts of the market respond differently at various stages of a cycle. Defensive sectors like healthcare, consumer staples, and utilities have historically held up best during downturns, offering stability when markets are under stress.
But as the tide turns, leadership tends to shift. More cyclical areas like financials, real estate, and technology often drive the rebound, benefiting from improving sentiment and economic momentum.
Another consideration is market capitalization. Often, investors are wary of small- and mid-cap stocks because they tend to be more volatile and can underperform during downturns.
