In their monthly article for Professional Paraplanner’s Development Zone, the Brand Financial Training team look at expectations and actions when dealing with volatile markets.
Due to globalisation, financial markets are more interconnected than ever before, leading to increased volatility, especially over the short term. The speed at which financial headlines can rocket from one crisis to another, recently seen with the tariffs introduced by the US , causes us to consider how we can protect our investments and how we should react. Often, the best answer is to not react at all, but this is easier for some than it is for others.
Building a well-diversified portfolio is fundamental to defending investments from periods of economic and political tension. A well thought through allocation of assets, aligned with risk profile, supports the foundations of an investment portfolio allowing economic tremors to pass through and eventually recover.
Risk Profiles
A risk profile very much aligns to an investor’s personality and circumstances that will help shape the correct investment strategy for them. A risk profile reflects tolerance to market volatility and fluctuations, the amount of time an investor is willing to invest for, and their investment goals, for example retirement or buying a house. Once this has been established, the right combination of assets can be chosen.
Asset Allocation
Asset allocation is the process of dividing the sum of money available amongst different asset classes:
- Shares – offer high growth and high risk.
- Bonds – offer stability and income.
- Cash – the safest investment, but with little return.
- Alternative assets – for example property, commodities, or infrastructure can add further diversification.
No single asset class behaves the same in all conditions, which is why it is so important to spread investments to balance the risks for when inevitable external shocks (such as tariffs) shake markets.
What are tariffs, and why are they important?
Tariffs are a tax on imports, usually imposed on a single country, designed to protect domestic goods and services by shifting increased prices of imports onto consumers, the idea being that this will encourage consumption of locally produced alternatives instead.
For example, the UK imposes a 10% levy on importing most types of car; the tariff is paid to the UK government by the company bringing the overseas goods into the country. Some of this, or all of it, will be passed to the customer.
Increased production costs on import reliant industries, due to tariffs, cause profits to potentially shrink. Manufacturers, tech companies, and consumer goods often feel the immediate impact of a tariff.
Tariffs can majorly disrupt markets through economic strain and emotional market responses; introducing uncertainty and unpredictability into supply chains and economic growth forecasts. In April, this uncertainty caused the International Monetary Fund (IMF) to downgrade global growth projections to 2.8% in 2025 and to 3% in 2026 from 3.3% for both years in the previous forecast, with US growth projected to slow to 1.8% in 2025, down 0.9% from the January forecast, due to ‘policy uncertainty and trade tensions’.
What should investors do during market shocks?
Headlines of external shocks hit prices as uncertainty increases; this is market volatility. It is the way we behave in these moments that can have a bigger impact on long-term results than the shock itself.
Price drops are historically short-lived and patience can save an investment. Coming out of the market in the downturn could result in losing the rebound and this is where diversification can give investors the confidence to remain in the market. One area may have dipped but others may potentially hold or even perform well as investors shift to other sectors, stabilising the portfolio.
The key is to avoid making very emotional decisions. Panic selling can be costly and when the market changes daily in reaction to economic and political affairs, an investors’ emotional uncertainty can confirm losses that might just otherwise have been temporary.
Although investors should always have an eye on long-term goals, this does not mean plans cannot sometimes change; rebalancing a portfolio is an option during market shocks. If some assets outperform others, this could be seen as an opportunity to sell high and buy low and some investors will use a shock in this way to their advantage. A diverse portfolio gives an investor the opportunity to rebalance as investments will not all be in one sector (which may have been hit by, for example, a tariff). This helps maintain a smooth and strong portfolio because knowing a portfolio is diverse allows an investor to weather short-term dips, without losing everything.
Conclusion
In times of stock market volatility, the best strategy for investors is to stay calm and the best way to stay calm is to build the foundations by understanding risk profile and developing a well-diversified portfolio around financial personality.
While this does not guarantee profits or prevent losses, it gives an investor the greatest opportunity to stay invested during the best and the worst of times.
About Brand Financial Training
Brand Financial Training provides a variety of immediately accessible free and paid learning resources to help candidates pass their CII exams. Their resource range ensures there is something that suits every style of learning including mock papers, calculation workbooks, videos, audio masterclasses, study notes and more. Visit Brand Financial Training.
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