You check your investment app over breakfast, and your stomach drops. The numbers are red again, showing losses that feel painfully real even though you haven’t sold anything. Your carefully built portfolio seems to be shrinking before your eyes, and the financial news offers little comfort with its dramatic headlines about market turmoil.
If this sounds familiar, you’re not alone. A market downturn can trigger anxiety in even the most experienced investors, making us question our strategies and consider drastic action. Yet history shows that those who navigate these periods thoughtfully often emerge in stronger positions than those who react emotionally.
This article provides some practical strategies for protecting your investments during market volatility, helping you maintain perspective when others are panicking. While market corrections are uncomfortable, they’re also normal parts of the investment cycle that you can weather successfully with a bit of preparation.
Understanding market downturns
Market downturns come in different shapes and sizes. Understanding what you’re facing will help inform your response. A correction occurs when markets fall 10% from recent highs, while a bear market represents a more severe 20% decline. Both are normal parts of the market cycle, though they feel anything but normal when you’re experiencing them.
Various triggers can spark a downturn. Sometimes it’s disappointing economic data, like inflation figures or employment numbers. Other times, geopolitical events create uncertainty, or specific sectors face challenges that ripple through the broader markets. Recently, concerns about interest rates and global growth have created volatility.
The FTSE 100 provides helpful historical context. Since its creation in 1984, it’s experienced numerous corrections and several bear markets, yet it has still delivered positive returns for long-term investors. The index fell dramatically during the 2008 financial crisis but recovered to new highs within five years. Similarly, the sharp pandemic-driven decline in 2020 was followed by a strong recovery.
The key lesson is that downturns are temporary, but their timing and duration are impossible to predict accurately. Markets can turn positive as quickly as they turned negative, often you’re your pessimism seems deepest.
Why panic selling rarely works
When your investments fall in value, your instincts scream at you to sell before things get worse. This emotional response, while natural, often leads to poor investment outcomes. Selling during a downturn crystallises your paper losses into real ones, locking in the damage without allowing time for recovery.
Consider an investor with £50,000 who panic sells after a 20% market fall, leaving them with £40,000. If they wait to reinvest until they feel comfortable again, the markets might have already recovered by 15%. In that scenario, they’ve not only locked in the £10,000 loss, but also missed the initial recovery gains.
Research consistently shows that missing just a few of the market’s best days dramatically reduces long-term returns. Ironically, many of these best days occur shortly after the worst ones, when investor sentiment is bleakest.
The solution isn’t to ignore your emotions, but to have a plan that acknowledges them. So, write down your investment strategy when the markets are calm, including what you’ll do during the inevitable downturns. This pre-commitment will help you avoid costly emotional decisions when volatility strikes.
Building a defensive portfolio
A well-constructed investment portfolio acts like a good shock absorber, smoothing out the bumps without eliminating your progress. Diversification across asset classes forms the foundation of this defence.
Investing solely in UK companies exposes you to country-specific risks. The global markets don’t always move in lockstep. So, spreading your investments internationally can reduce volatility. Similarly, avoid concentration in any single sector. Technology shares might soar one year and plummet the next, while utilities or consumer staples often provide more consistent, if less spectacular, returns.
During volatile periods, quality is paramount. Established companies with strong balance sheets, consistent cash flows and competitive advantages tend to weather downturns better than speculative investments. These might not offer the excitement of the latest hot stock, but they’re more likely to survive and thrive through market cycles.
While shares offer growth potential, bonds typically provide stability, property adds protection against inflation, and cash offers immediate liquidity. Regular rebalancing keeps your portfolio aligned with your goals.
Market movements naturally cause some investments to grow faster than others, potentially exposing you to more risk than intended. Rebalancing forces you to sell high and buy low, a discipline that always serves investors well over time.
For those making regular contributions, pound-cost averaging naturally smooths out market volatility. By investing the same amount regularly, you automatically buy more units when prices are low and fewer when they’re high.
Protecting different types of investments
Different investments require different protection strategies during downturns. For pensions, your approach depends largely on your age. Younger investors can generally ride out short-term volatility, even welcoming it as an opportunity to accumulate more units cheaply. Those approaching retirement need more careful consideration, potentially shifting towards more defensive allocations.
Drawing from your pension during a market downturn requires careful consideration.
Withdrawing from a falling portfolio can permanently damage your retirement income. Instead, consider reducing withdrawals temporarily, drawing from your cash reserves, or taking income from more stable investments while allowing your growth assets time to recover.
If you’ve got an ISA, you should resist the temptation to withdraw funds during a downturn. The annual allowance is use-it-or-lose-it, so any withdrawals will permanently reduce your tax-efficient investment capacity. If you need funds, consider using other sources first.
Bonds, traditionally portfolio stabilisers, can also face challenges, particularly when interest rates rise. Government bonds generally offer more security than corporate bonds during market stress, though their lower yields reflect this safety.
When to seek professional advice
Market downturns are temporary interruptions in the long-term growth story of the markets. They test every investor’s resolve. But those who prepare thoughtfully and respond calmly often find opportunities where others see only threats.
Diversifying your portfolio, focusing on quality investments and keeping your long-term goals in sight will help you protect your wealth while positioning for future growth.
So, stay disciplined, use the strategies outlined here, and don’t let short-term volatility derail your long-term plans.
However, if you’re losing sleep over your investments, struggling to stick to your strategy or unsure whether your portfolio remains appropriate, we can provide a valuable perspective. We’ll review your investments and ensure you’re well-positioned for whatever markets might bring. Book a consultation to learn how we can help you invest with confidence.