Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 351

Volatility is the new normal, so it’s time to adjust your portfolio

Markets perform well when the key indicators behind economic growth are strong. But when those foundations are rocked, things can get a bit scary.

And that’s where we are now.

How effective will the stimulus packages be?

Since the start of the year Australia’s economy has been hammered by a series of events, including horrific bushfires, the spread of the COVID-19 virus and a resumption of falling interest rates to try to stimulate a sluggish economy suffering from a lack of consumer spending.

It has led us to reduce this year’s forecast economic growth for Australia from an already sluggish 1.7% to an anaemic 1%. The risk of Australia going into recession is real, despite the massive stimulus packages from the federal government. The third package of $130 billion takes fiscal expenditure to a level never seen before, with this one decision costing more than the total annual health and social security budget.

But we are also at the mercy of global and unpredictable events, sometimes known as ‘VUCA’ (volatility, uncertainty, complexity and ambiguity).

Take interest rates in the US, for example. In December, markets were talking up the expectation for rates to rise. Weeks later the US Federal Reserve cut rates by 0.5%, and following the dramatic realisation of the terrble impact of coronavirus, it was lowered effectively to zero, a range of 0% to 0.25%, on 15 March 2020.

You cannot predict events like COVID-19 or Russia erupting into an oil production war with Saudi Arabia, but your portfolio will have to be prepared for such events.

Investing with VUCA

You also cannot predict how long such events will impact markets. Coronavirus will remain an overwhelming issue for many months, and the impact on government budgets will play out for years. It was the same with the trade wars, something that initially seemed a matter for diplomacy to resolve, but it continued to escalate throughout last year with rising market impacts.

For now, that’s yesterday’s news as coronavirus and oil shock fears have combined to create fears of global recession.

The shockwaves from those fears have created a series of record market movements, the type of volatility in prices not seen since the peaks of other crashes such as during the GFC and, indeed, the Great Depression. Heavy falls one day are followed by market bounces as investors scramble to take advantage of what were perceive to be low share prices.

The investors selling into the market were panicking, which is never a good time to make investment decisions. But were the people buying making a better decision? Buyers look like heroes one day, then late to the party the next.

Don’t try to time the market 

Investors deciding how they want their portfolio to perform should not only think about returns. A major consideration is the ability to be able to withstand unexpected impacts. We have seen many examples of market-moving events over the past decade and each has one thing in common – unpredictability, as you can see in the timeline below.

At Citi, from the early part of 2020, we noticed an increase in clients wanting to lock in returns and reduce risk. ‘VUCA’ is driving a renewed focus on income options such as corporate bonds and tailored investments that can give investors access to equities in a structure that can reduce risk. Even before the full impact of coronavirus was appreciated, investors were moving into instruments that allow individual shares to drop between 30-40% without an impact on their capital and return.

We have also seen a significant increase in foreign exchange transactions as investors shift into US dollars to take advantage of the USD’s safe-haven status. We have long been an advocate that a portfolio needs to be diversified not just by asset class but also geographically.

What should you do in these unprecedented times, and in fact, at all times?

  • Stress-test your portfolio regularly to understand how it performs during market uncertainty.
  • Ask yourself if the income from your investments is sufficient for your needs in a low interest environment over the long term.
  • Diversify smartly by combining asset allocation with instruments which can earn a positive return, even if the market drops. For example, Citi offers a tailored investment which pays clients an income of 5% per annum if the equity market goes up but it also pays a positive return of 5% even if the market drops by less than 25%.
  • Consider buying another currency - you buy many products from overseas, should you take the same approach for currency?

 

Gofran Chowdhury is Head of Investment Specialists at Citi Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual.

For other articles by Citi, see here.

 

RELATED ARTICLES

Hold fire on your fund manager over short-term declines

Bigger fall, bigger bounce: small caps into and out of recessions

Bear markets don't go paw-in-paw with recessions

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Latest Updates

Investment strategies

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Planning

Super, death and taxes – time to rethink your estate plans?

The $3 million super tax has many rethinking their super strategies, especially issues of wealth transfer on death. This reviews the taxes on super benefits and offers investment alternatives.

Taxation

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

Shares

The megatrend you simply cannot ignore

Markets are reassessing the impact of AI, with initial euphoria giving way to growing scepticism. This shift is evident in the performance of ASX-listed AI beneficiaries, creating potential opportunities.

Gold

Is this the real reason for gold's surge past $3,000?

Concerns over the US fiscal position seem to have overtaken geopolitics and interest rates as the biggest tailwind for gold prices. Even if a debt crisis doesn't seem likely, there could be more support on the way.

Exchange traded products

Is now the time to invest in small caps?

With further RBA rate cuts forecast this year, small caps may be key beneficiaries. There are quality small cap LICs and LITs trading at discounts to net assets, offering opportunities for astute investors.

Strategy

Welcome to the grey war

Forget speculation about a future US-China conflict - it's already happening. Through cyberwarfare and propaganda, China is waging a grey war designed to weaken democracies without firing a single shot.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.