Uncertain markets have a way of testing even experienced investors.
One moment, things feel relatively steady. The next, markets are responding to interest rate changes, inflation updates, global events or shifts in economic sentiment.
When investment values fall, it’s understandable to question whether you should make a change. Selling investments, switching strategies or moving to cash can feel like a way to regain control until conditions become more predictable.
The challenge is that short-term market movements are difficult to predict, including when a market recovery might begin.
Historical market data has shown that some of the strongest trading days can occur close to some of the weakest. This means investors who move out of the market during a downturn may also risk missing part of the recovery.
At LBW, our role is to help clients consider short-term market movements within the context of their longer-term goals, timeframe, risk tolerance and broader financial position.
In this article, we explore what market volatility can mean for your investments, the potential cost of trying to time the market and why a long-term investment strategy can provide a useful framework when markets are uncertain.
What does market volatility mean for your investments?
Market volatility refers to how much and how quickly investment prices move over a period of time.
Periods of higher volatility can occur for many reasons, including changes to interest rates, inflation, economic conditions, company performance, geopolitical events and investor sentiment.
For investors, this can mean seeing the value of a portfolio rise and fall, sometimes significantly, over relatively short periods.
While these movements can be uncomfortable, volatility is a normal part of investing. The level of volatility you experience will also depend on what you are invested in. Different asset classes carry different levels and types of investment risk.
The important question isn’t necessarily whether markets are moving, but whether those movements change the reasons behind your investment strategy.
The potential cost of missing a market recovery
When markets fall, moving investments to cash until conditions appear more stable may seem like a way to reduce uncertainty.
The difficulty is knowing when to get back in.
Some of the market’s strongest individual trading days have historically occurred during periods of significant volatility. If an investor moves out of the market following a decline, there is a risk they may also miss some of the subsequent recovery.
What happens when you miss the market’s best days?
Looking at the S&P/ASX 300 Index over the 25 years from April 2000 to May 2025, the index returned an average of approximately 8.2% per year with dividends reinvested.
Over the same period, the average annual return was substantially lower when some of the strongest trading days were excluded:
- Missing the 10 best trading days reduced the average annual return to approximately 6%.
- Missing the 20 best trading days reduced it to approximately 4.3%.
- Missing the 30 best trading days reduced it to approximately 2.8%.
These figures demonstrate the potential impact that missing a relatively small number of high-performing days can have on longer-term returns.
Importantly, some strong trading days have occurred during periods of significant market uncertainty, including around the Global Financial Crisis and COVID-19 pandemic.
This doesn’t mean markets will always recover quickly, nor does it mean remaining invested is appropriate for every investor in every circumstance.
Instead, it demonstrates one of the challenges of trying to predict both when to leave the market and when to get back in.
Timing the market versus time in the market
Trying to time the market involves making investment decisions based on predictions about short-term movements, such as selling before an expected decline and buying again before a recovery.
The difficulty is getting both decisions right.
Markets respond to an enormous range of economic, political and behavioural factors, and consistently predicting short-term movements can be challenging.
A long-term investment approach takes a different perspective. Rather than focusing primarily on what markets may do next week or next month, it considers how an investment strategy supports your financial objectives over the timeframe available to you.
Depending on your circumstances, this may involve:
- Remaining invested through different market cycles
- Maintaining appropriate diversification
- Giving investments time to potentially benefit from compounding
- Regularly reviewing your portfolio against your goals
- Avoiding decisions driven primarily by short-term fear or excitement.
Long-term investing doesn’t mean ignoring what is happening in financial markets. It means considering market events within the context of your broader financial strategy before deciding whether a change is appropriate.
Why does a long-term investment strategy matter?
Investment markets naturally move through periods of growth and decline.
Over a long investment timeframe, you are likely to experience both.
A long-term strategy provides a framework for deciding how much risk you’re prepared to take, what you’re investing towards and how different investments fit together within your portfolio.
It can also help distinguish between a market event that creates uncertainty and a change that genuinely affects your financial circumstances or objectives.
Your strategy may consider factors including:
- Your financial goals
- Your investment timeframe
- Your tolerance and capacity for risk
- Your need for income
- Your broader financial position
- How your investments are diversified.
There is no single investment strategy that is suitable for everyone. Someone investing for several decades may have very different considerations from someone approaching retirement or expecting to access their investments in the near future.
Focus on what you can control
Investors can’t control what financial markets will do next, but there are aspects of an investment strategy that can be managed.
Your goals
Clear financial goals give your investment strategy a purpose and provide something against which decisions can be assessed.
Your timeframe
How long you have available to invest can influence the types and level of investment risk that may be appropriate for your circumstances.
Your diversification
Spreading investments across different asset classes, industries and markets can help reduce reliance on the performance of any single investment or area.
Diversification does not eliminate investment risk, but it can form an important part of managing it.
Your risk tolerance
Understanding how much volatility you’re financially and emotionally comfortable with is an important consideration when developing an investment strategy.
Your investment costs
Fees and other investment costs can affect returns over time and should be considered when assessing an investment portfolio.
Focusing on these factors can provide a more structured basis for investment decisions than attempting to predict short-term market movements.
When should you review your investments?
Taking a long-term approach doesn’t mean your investment strategy should never change.
There are many valid reasons to review your portfolio, particularly when your circumstances or financial objectives change.
These may include:
- A significant change in your income or financial position
- Changes to your short or long-term goals
- A change in your tolerance or capacity for risk
- Approaching or entering retirement
- Receiving an inheritance or other significant sum of money
- Changes to your family or personal circumstances.
Regular reviews can also help determine whether your portfolio remains appropriately diversified and aligned with your objectives.
The distinction is between making a considered change because your circumstances, needs or strategy have changed and reacting primarily to short-term market movements.
Staying focused during uncertain markets
Market downturns can be uncomfortable, particularly when headlines are dominated by uncertainty and investment values are falling.
But market volatility alone doesn’t necessarily mean your investment strategy needs to change.
Investments can rise and fall, and no strategy can remove investment risk entirely. A clear financial plan can, however, provide a framework for assessing what is happening in the market against your own circumstances.
Rather than focusing solely on the question, “What will the market do next?”, it may be more useful to consider:
Does my current investment strategy still suit my goals, timeframe and tolerance for risk?
If your circumstances haven’t changed, short-term volatility may not necessarily require a change to your investment strategy. If your goals, timeframe or financial position have changed, it may be appropriate to review your approach.
Get help with your long-term investment strategy
When markets are uncertain, understanding why you hold particular investments and how they fit within your broader financial plan can help you make more considered decisions.
Our Geelong financial advisers at LBW work with clients to understand their financial position, goals, timeframe and investment preferences before considering strategies appropriate to their individual circumstances.
If you’d like to review whether your current investment approach still reflects your goals, contact the LBW Wealth team on (03) 5221 6111 or visit https://lbwca.com.au.
This blog provides general educational information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. LBW Business + Wealth Advisors is an Authorised Representative of LBW Wealth Pty Ltd ABN 56 652 382 128 AFSL 534569. Please see our website www.lbwca.com.au or call 03 5221 6111 for more information on our available services.
