Investing in volatile times

Periods of market volatility – whether triggered by geopolitical conflict, inflationary cycles, interest rate shocks or global recessions – are not anomalies. They are an expected part of the financial market’s structure. What matters most in these situations isn’t how accurate investment predictions are but how well prepared the investors are and how calmly they act. Volatility itself is not a risk. The real risk arises when investors panic, respond emotionally and exit their strategy too early.

Timing the market is not a strategy

There is a common tendency to “de-risk” by exiting the market during periods of turmoil, often under the rationale of waiting for a more favourable re-entry point. While this decision may initially seem prudent – especially when markets continue to decline – the real challenge lies in determining when to re-enter. That second decision is rarely made with the same clarity or conviction. In fact, it becomes exponentially more difficult, as fear of further losses or the regret of re-entering too soon distorts judgment. History shows that some of the most substantial market rebounds occur soon after times when confidence in the market is at its lowest. These are recoveries that are difficult to time and nearly impossible to benefit from if you’re out of the market and holding cash. A resilient investment strategy should not be based on the hope of avoiding volatility. It should be built with the expectation that volatility will occur and be well positioned to manage it. This requires a portfolio structure that includes instruments designed to endure or even benefit from stress scenarios.

Building resilience: Hedging

Resilience in a portfolio is not synonymous with excessive defensiveness or holding too much in cash. It stems from incorporating asset classes and non-directional instruments that behave differently in adverse scenarios. Natural hedges are essential components of such a design.

For example:

• During recessionary periods, long-duration government bonds have historically acted as effective buffers.
• In inflationary cycles, real assets – such as commodities, inflation-linked bonds or infrastructure – tend to preserve purchasing power.
• In times of geopolitical stress, gold may serve as a safe haven.

The principle is clear: Investors should identify exposures in the portfolio that are vulnerable to specific macroeconomic threats and introduce instruments that counterbalance those vulnerabilities.

Diversification matters: Alternatives can help achieve it

Diversification remains one of the most effective tools for risk management. By spreading investments across asset classes that are not correlated, investors can reduce portfolio volatility and drawdowns during market stress. Traditional diversification between equities and bonds, while still relevant, has shown limitations – especially in environments where both asset classes fall simultaneously, as we saw in 2022. This is where alternatives can add significant value.

Private markets, market-neutral hedge funds, uncorrelated strategies such as catastrophe bonds and arbitrage strategies can provide access to returns that are less connected to the movements of traditional markets. For High Net Worth investors, these instruments are not only accessible but often essential for achieving true diversification. It is important to note that not all alternatives serve the same role. Some are return enhancers; others are diversifiers or help manage volatility. Understanding their structural role is key to integrating them meaningfully.

Behavioural risk: The invisible threat

Perhaps the most underestimated risk in portfolio construction is behavioural. Investors, even the most sophisticated, often underestimate their own tolerance for losses. Volatility may not change the fundamentals of an investment but it can change an investor’s perception – and that perception can drive poor decisions. Significant drawdowns tend to provoke emotional responses. This is why a well-constructed portfolio doesn’t aim for the highest possible return in stable market conditions, but for resilience across a cycle. Reducing portfolio volatility can have the counterintuitive effect of increasing long-term returns – not through higher yield, but through better investor behaviour. Mild losses in a turbulent period can feel insignificant in theory. In practice, they make all the difference between a client holding firm or abandoning a strategy at the worst possible moment.

Long-term investing: Horizon matters

One of the best mitigators of volatility-induced loss is alignment between investment horizon and portfolio construction. A portfolio designed for a ten-year horizon should not be judged by its one-year volatility. However, this mismatch often happens – not because of an ineffective strategy but because investors lose sight of the horizon during storms. Structuring portfolios that embed this discipline – through lock-in periods, illiquidity premiums or goal-based segmentation – can help reinforce commitment during difficult times. When the investment design reflects the horizon, the probability of exiting at a loss is substantially reduced.

Conclusion

Volatile markets are not a deviation from the norm – they are the norm. Managing wealth through them requires more than reacting after the fact; it requires a forward-looking strategy. At the High Net Worth level, an investment strategy must go beyond benchmark chasing and short-term performance metrics. The conversation should shift toward structural resilience, strategic hedging, behavioural safeguards and horizon alignment.

• By Savvas Christodoulou, CFA, Head, WM Investment Advisory, Eurobank Cyprus

This opinion article first appeared in the 2025 edition of The Cyprus Journal of Wealth Management. Click here to view it. To view the full edition, click here