It has been a challenging 18 months for many investors. Here are three fundamentals that we continue to think about when it comes to market volatility and long-term investment success.

1. Stay invested

Timing isn’t critical to long-term success. Staying invested (not going to cash) is generally key for investors because markets can turn around quickly, even during the most extreme periods of volatility. In fact, 70% of the best days for the S&P 500 fell within just two weeks of the worst days. By pulling out of the market, investors could miss a few bad days, but they will also end up missing all the good days that follow. This means panic selling can lead to missed opportunities on the upside.

2. Diversify

A market drawdown can reveal to an investor that a portfolio was not as well diversified as expected. It is important for investors to understand how each asset class behaves at different points of a market cycle and the role it plays within your portfolio. For example, quality defensive assets, such as cash, bonds and debt securities can help stabilize a portfolio when stocks are in the red and provides a lever that can be pulled to selectively access buying opportunities. Having sufficient cashflow and liquidity is also vital to avoid becoming a forced seller in a down market.

3. Rebalance

When designing bespoke investment portfolios, a fundamental starting point in our advice process is the development of a target asset allocation strategy that is suitable for each client’s individual goals and circumstances. The chance of investment decisions being made from a position of fear and uncertainty is increased without a robust target asset allocation strategy in place and can lead to emotions negatively impacting investment actions as described below.

Using multiple asset classes enables the regular rebalancing of a portfolio back to its target asset sector weighting. Over the long term, this results in the taking of profits when assets have risen in price and purchasing of assets when they have fallen in price. This philosophy removes emotion from the decision-making process and replaces the need to attempt a ‘timing the market’ strategy.