How to manage investment risk during market uncertainty

Key takeaways:

• To manage investment risk during market uncertainty, investors can benefit from a clear plan that keeps decisions aligned with their goals, risk tolerance, and time horizon.
• Market cycles and volatility are normal parts of investing, but short-term indicators and headlines should be interpreted with caution rather than driving reactive decisions.
• Diversification may help manage concentration risk, while hedging with derivatives can introduce complexity, costs and the possibility of larger losses.
• Common behaviours in unsettled markets include panic-selling, staying on the sidelines and dip-buying without a plan, all of which can undermine long-term discipline.
• Practical approaches such as rebalancing, maintaining liquidity, dollar-cost averaging and reviewing risk tools may support resilience, but they cannot prevent losses.

This material is marketing content and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results. Investing involves risk. Depending on the product, you may lose some or all of your investment, and losses may exceed your initial investment with some instruments.

Introduction: Navigating uncertainty with a clear strategy

Periods of market turmoil and economic uncertainty are an inevitable part of the investment journey. During such times, maintaining a calm, strategic mindset is essential.

This guide explores how to manage portfolio risk when markets become volatile, with insights into recognising uncertainty and avoiding common behavioural pitfalls. The aim is to help investors review their approach during market turbulence and reduce the risk of reactive decisions.

Note: Investments can fall as well as rise, and you may get back less than you invest.

Understanding market cycles: The value of long-term thinking

Market volatility is a natural feature of financial cycles. While sharp declines may be triggered by events such as geopolitical tensions, unexpected central bank decisions, disappointing corporate earnings, or shifts in investor sentiment, short-term sell-offs are not unusual and should be assessed in context.

Some investors turn to indicators such as the Sahm Rule, a recession-signal framework based on the three-month average unemployment rate rising by 0.5 percentage points above its 12-month low. Like any indicator, its usefulness can vary across periods. While such frameworks can provide useful context, they should be interpreted with caution. Overreacting to headlines or isolated data points can lead to decisions that do not fit an investor’s long-term plan.

Some long-term investors emphasise discipline and valuation awareness, including reviewing exposure when valuations are high and reassessing opportunities when markets fall. This kind of disciplined perspective reinforces a key principle: markets have often recovered over time, but outcomes vary and recoveries can take longer than expected.

Bottom line: Market ups and downs are part of investing. A disciplined approach may help investors stay aligned with their plan, but returns are not guaranteed, and losses remain possible.

Maintaining discipline during volatile periods

During periods of elevated market volatility, some investors reassess their strategies, rebalance portfolios, or review whether their allocations still match their long-term goals, rather than exiting the market automatically.

Higher volatility is often accompanied by increased emotional pressure. Indicators such as the VIX Index can reflect rising investor anxiety — and volatile markets tend to test emotional discipline.

Recognising that volatility is a normal part of investing can support discipline and help you stay focused on your broader financial plan.

Protecting your portfolio through risk management

Diversification

Diversification remains a widely used way to try to manage investment risk. By spreading exposure across a range of asset classes, such as equities, fixed income, and exchange-traded funds (ETFs), investors may reduce their reliance on any single sector, region, or asset type.

That said, diversification is not a guarantee against losses. Even well-diversified portfolios may experience short-term drawdowns. Furthermore, certain instruments such as ETFs carry their own risks, including:

• Market risk. ETFs remain subject to overall market movements.
• Liquidity risk. Some ETFs may be difficult to buy or sell in large volumes.
• Tracking error. The ETF may not precisely replicate the performance of its benchmark.
• Management risk. Actively managed ETFs rely on the decision-making of fund managers.

Diversification is a long-term strategy that may help you manage portfolio risk, but it is not an insurance policy against all market declines.

Hedging with financial instruments

In some cases, investors may use options or other derivatives to hedge against downside risk. However, these instruments are complex and can magnify losses, potentially exceeding the initial investment with some strategies. Hedging may reduce certain risks, but it can also introduce costs, timing risk and product-specific risks.

For example, purchasing a put option may limit downside on a specific position, depending on the strike price, expiry and position size, but the premium paid can be lost if the market does not move as expected. Hedging strategies may also demand precise timing and ongoing monitoring.

Before using derivatives, investors should understand the instruments, costs, and risks; some may also choose to consult a regulated professional depending on their circumstances.

Common investor behaviours in unsettled markets

Market stress often triggers a variety of behavioural responses, some of which can undermine a long-term investment plan. Common patterns include:

• Emotional reactions. Panic-selling in response to falling prices, which may lock in losses.
• Inaction. Waiting on the sidelines in the hope that markets will stabilise, potentially missing a recovery.
• Dip-buying without a plan. Adding exposure simply because prices have fallen, without reassessing valuation, risk tolerance or portfolio concentration, can increase losses if markets continue to decline.

Understanding your natural tendencies can help you anticipate emotional responses and make more measured decisions when markets are volatile.

Practical ways to stay resilient in times of market stress

Here are common approaches some investors use to maintain discipline and manage risk during periods of market uncertainty:

Stay calm and keep perspective

Emotional decisions can lead to short-term actions that do not fit a long-term plan. Historically, many markets have recovered after declines, but timing and outcomes vary. Reviewing decisions against your goals and risk tolerance can reduce the risk of reactive moves.

Rebalance your portfolio

Volatility can shift the balance of your investments. Periodic rebalancing can help keep your asset allocation aligned with your objectives and risk profile.

Maintain diversification

A portfolio spread across asset classes, sectors and geographies may reduce reliance on any single area of the market. Diversification does not prevent losses, but it can help manage concentration risk.

Keep a cash buffer

Maintaining sufficient liquidity may reduce the need to sell investments during market lows. Cash reserves can also provide flexibility if expenses arise or if an investor chooses to rebalance.

Consider dollar-cost averaging

Investing a fixed amount at regular intervals — regardless of market conditions — can help some investors spread entry points over time, but it doesn’t guarantee better returns; it can also mean missing gains if markets rise quickly.

Review your risk tools

Risk management mechanisms such as stop-loss orders can be reviewed periodically, noting they may execute at worse prices in fast markets due to slippage and may trigger during short-term volatility. Their use should match the investor’s goals, risk tolerance and product type.

Conclusion: Volatility is inevitable, but risk management still matters

Market volatility can feel uncomfortable, but it doesn’t have to lead to reactive decisions. A structured plan can help you review market moves in the context of your goals, risk tolerance and time horizon, rather than responding only to short-term pressure.

Diversification, liquidity planning, risk awareness and regular portfolio reviews may all support that process, although they cannot prevent losses or guarantee better outcomes. In uncertain markets, the aim is not to predict every move, but to make decisions that remain aligned with your broader financial plan.