Four ways to invest through market volatility

After a volatile March that has affected valuations in many investment asset classes, many investors are wondering how to protect the value of their capital while still earning a genuine return.

Depending on your investment goals, how long you expect to be invested, your risk appetite, and your views on current market dynamics, there are myriad investment strategies and options available. 

While markets and investors make calculated judgements on how individual investment types are likely to be affected in the short-, medium- and long-term, no one can predict outcomes with certainty, which is why approaches can range from defensive to more opportunistic, and everything in between. 

We’ve outlined a few examples of how different investors may approach periods of market volatility, but any options you may wish to consider should depend on your overarching investment objectives, how much risk you’re comfortable with, and your investment time horizon, as well as the time and effort required to implement your chosen approach. 

Investors focused on long‑term income and preserving capital may consider inflation‑linked returns currently close to 3 per cent above inflation, with less exposure to sharemarket volatility.

The price of government bonds, and therefore the capital return,  has fallen globally this year as bond yields have risen, reflecting concerns that geopolitical tensions, including the Middle East conflict, could contribute to higher oil prices and inflation.

Inflation‑linked bonds – also known as Treasury Indexed Bonds (TIBs) – may be worth considering in a higher-inflation environment as they protect against inflation eroding the value of your money.

These Federal Government‑issued bonds are designed to help protect purchasing power by linking returns to inflation. Both income payments and the bond’s value at maturity rise in line with the Consumer Price Index.

Since the Middle East conflict 28 February, real yields (the return above inflation) on 10‑year and 15‑year Australian TIBs have risen, briefly reaching almost 3 per cent on 10‑year bonds and remaining around that level for longer-term TIBs. 

Pros: Government-backed security; inflation-adjusted returns that are locked in when you buy.

Cons: Prices may move in the short term; if you sell a bond before maturity you’ll get the market value, which may be lower than the value at which it was issued.

When markets are volatile, it may seem counter-intuitive to sell assets that have been performing well, but for active investors, it can be a time to step back, review what has worked, and adjust investment portfolios.

Taking profits in some sectors doesn’t mean stepping out of markets altogether. It can create room to reinvest in areas that have fallen out of favour but still offer long‑term growth potential.

Energy stocks highlight this dynamic. For many portfolios, energy stocks had provided valuable income and protection against inflation, but after the sector surged as oil prices rose due to geopolitical tensions, they have now delivered a 45.1% return over the past year, according to the MSCI World Energy Index, and a 33.6% return since the beginning of this year.  

Depending on how investors think the Middle East conflict will affect oil prices in the future, it may be worth considering whether it makes sense to lock in some gains and look for better value in other sectors.

Parts of the technology sector, particularly software stocks, have seen sharp price falls in recent months, although investment in AI  continues and many businesses remain strategically important to the global economy. Lower prices have improved valuations, particularly for investors with a longer time horizon.

This type of repositioning suits investors who are comfortable in high-risk investments and who are prepared to monitor risks as conditions change. 

For those who prefer a simpler approach, diversified managed funds with active investment and risk management strategies delivered by experienced investment managers can offer a practical alternative by making similar adjustments on investors’ behalf.

Pros: Potential for stronger returns despite broad market downturns. 

Cons: High risk; requires active market monitoring, risk management and asset reallocation.

Investors who believe markets are in for more turbulence in coming months might consider increasing their exposure to traditional safe haven investments, with gold being one of the most commonly used.

Gold is often used to preserve capital and limit risk during uncertain times, particularly when investors are concerned about longer‑lasting inflation or economic stress. 

While gold prices have been volatile in recent weeks, due partly to profit-taking at record highs, it remains a valuable long-term portfolio diversifier, with the gold spot price in early April still 50% higher than it was a year ago.

Central banks continue to hold and buy gold as part of their reserves amid geopolitical uncertainty, rising government debt and concerns about currency stability, reinforcing gold’s role as a strategic holding rather than a short‑term trade.

For investors concerned about ongoing inflation or geopolitical risks, a strategic allocation to gold may help improve portfolio resilience. 

If you’re looking for an alternative way to include gold in a diversified portfolio, consider a fund that tracks the gold price without requiring you to own gold directly.

Pros: In times of continuing geopolitical volatility, gold and other safe havens can protect wealth and limit risks associated with market fluctuations.

Cons: Unlike many other investment types, gold doesn’t offer a yield or income stream.

Investors who are uncomfortable with current levels of volatility, or who expect to draw on their investments within a short timeframe, may opt for a more defensive investment mix.

This might include reducing the proportion of higher-risk, growth-oriented investment assets, such as shares, investing in managed volatility investment funds, or increasing the proportion of lower-volatility options, such as select fixed interest options and cash, which may benefit if interest rates remain higher.

Investors who may need to draw on their investments in the next year or two may benefit from building a cash buffer or ‘bucket’ from which they can draw an income for a period of time without needing to sell other investments during periods of lower market prices.  

Investors who are anxious about volatility may choose to sell a portion of their relatively high-performing assets to cash in on recent returns.

Some investors may consider selling underperforming assets to offset capital gains in other areas for tax purposes. 

However, if markets recover more quickly than expected, lower-risk investment types such as cash are unlikely to keep pace. This means that investors who are looking for a higher return over the medium to long term may end up buying back into growth investments at a higher price. 

Pros: Reduced volatility over the short term; for retirees and income investors, the ability to avoid selling some assets at lower valuations; potential tax benefits for some investors.

Cons: Risk of locking in losses and having to buy back into growth investment types at a higher price. Potentially lower long-term growth from lower-return investment asset classes such as cash.

History has shown that markets tend to trend upwards over time and long-term investors generally benefit from remaining invested in line with their investment strategy, rather than reacting to short-term market moves. 

That said, it may be beneficial to make adjustments to your approach in line with your investment objectives.