Annabelle Dickson
3 minutes reading time
With conflict escalating in Iran, markets have responded with heightened volatility. When events like these unfold, it’s natural to feel uneasy. Headlines intensify, prices move quickly and uncertainty rises.
But history shows that volatility, while uncomfortable, has often been temporary.
While volatility typically spikes during periods of uncertainty, markets have historically tended to absorb geopolitical shocks and refocus on fundamentals such as corporate earnings, economic growth and monetary policy.
Periods like this are a reminder that volatility is a normal part of investing, not a signal to abandon long-term plans.
What Australian investors have been doing
Recent ETF flows suggest investors may have been adjusting their exposures rather than moving to the sidelines, with industry flows remaining strongly positive.
Market data points to rotation within markets, not broad-based risk aversion.
Australian investors have continued to allocate to broad Australian or global market exposures, while others have been selectively allocating to specific sectors such as resources.
At first glance, recent market moves could suggest shifting investor sentiment. However, context is critical when positioning portfolios.
According to Betashares Senior Investment Strategist, Cameron Gleeson, periods of volatility should be a reminder for investors to refocus on building a strong core portfolio that can help to weather different market environments.
“In uncertain markets, it’s important to ensure your core portfolio is well diversified and aligned to your long-term objectives,” he said. “Implementing a dollar cost averaging approach can help smooth entry points over time, rather than attempting to time short-term market moves.”
He added that while short-term fluctuations may create tactical opportunities, these should be assessed carefully within the context of an investor’s broader portfolio strategy.
“Rather than reacting to headlines, investors may benefit from maintaining disciplined core exposures while selectively assessing tactical opportunities that are aligned with an investor’s long-term strategy and time horizon.”
Common mistakes during volatile periods
As we have outlined here, market downturns tend to test investor discipline. Some of the most damaging decisions to portfolio outcomes are driven by emotions.
- Panic selling
Selling during sharp declines can lock in losses and can also mean missing a potential recovery, which can begin before sentiment improves.
- Trying to time the market
Short-term movements are unpredictable. Missing even a small number of strong recovery days can significantly reduce long-term returns.
- Making drastic allocation shifts
Large, reactive changes to asset allocation can derail a long-term strategy and could even increase portfolio risk.
- Halting regular investments
Continuing to invest during downturns can improve long-term outcomes through dollar-cost averaging. You can learn more about dollar-cost averaging here.
- Holding excessive cash
While liquidity is important, remaining overly defensive for extended periods can result in missed growth opportunities once markets stabilise.
Why staying calm matters
Volatility feels uncomfortable in the moment, but a well-diversified portfolio aligned to your long-term objectives can help to withstand these environments.