4 Keys to Keeping a Strong Portfolio During Market Volatility

Guillermo Tello, CFA, CFP®
Vice President and Senior Wealth Advisor
Washington Trust Wealth Management

Market downturns can be stressful, but they’re also part of the normal investing cycle. Historically, every bear market has eventually given way to recovery and growth. The challenge isn’t avoiding volatility altogether; it’s learning how to navigate it without making mistakes that could sabotage your long-term goals. 

Here are four keys to keeping your portfolio strong during market volatility.

1. Reassess Risk: Tolerance vs. Capacity

When investors talk about risk, they often focus on “risk tolerance,” or their emotional comfort with swings in the market. But equally important is “risk capacity”—your financial ability to absorb losses without jeopardizing your goals.

Your risk capacity depends on:

• Time horizon: When will you need to access these funds? Someone with 20 years before retirement can typically endure more volatility than someone already drawing income.
• Financial goals: Are you saving for retirement, funding college tuition in two years, or leaving a legacy? Timing matters.
• Other resources: Reliable income sources, pensions, or cash reserves can give you more breathing room.

A portfolio designed with these factors in mind usually includes a buffer of bonds and cash. These safer assets not only dampen volatility but also reduce the need to sell stocks in a downturn, helping you avoid turning a temporary decline into a permanent loss.

2. Keep Temporary Losses Temporary

Volatility is temporary, but selling in panic can create permanent loss, converting a short-term paper decline into a lasting setback. The most successful investors stay disciplined through downturns, maintaining diversified portfolios and seizing rebalancing opportunities.  Maintaining liquidity in bonds and cash gives you the flexibility to stay invested in equities for the long run. The longer your investment horizon, the greater your ability to ride out downturns and benefit from the recovery that follows.

3. Take Advantage of Opportunity Created by Volatility  

While it’s easy to see only the losses during a market decline, a downturn also presents opportunities to rebalance your portfolio. For instance, if equities fall in value while bonds hold steady, your portfolio may drift away from its intended allocation. Your advisor can sell a portion of bonds and use the proceeds to buy equities at a discount. Over time, this discipline can improve long-term returns.

If you’re in your accumulation years, volatility can be your ally. Your regular contributions, whether into a retirement plan or taxable account, buy more shares when prices are lower, setting you up for greater growth when markets recover.

4. Harness the Power of Periodic Reviews

Market downturns often prompt investors to revisit their strategies—and that’s a healthy instinct, as long as the response is measured. Periodic reviews with your advisor are essential for keeping your portfolio aligned with your life and goals.

During these reviews, you and your advisor can:

• Ensure your allocation still matches your time horizon and objectives.
• Rebalance to take advantage of opportunities.
• Adjust as your risk capacity changes (for example, increasing liquidity as retirement nears).
• Explore tax strategies such as tax-loss harvesting, Roth conversions, or charitable giving, which can be especially effective during market volatility.

Washington Trust Wealth Management Can Help

If potential market volatility has you feeling uneasy, it’s a signal to revisit your strategy, not abandon it. Our experienced advisors work with you to maintain the right mix of assets, ensuring your investment goals are in line with your risk tolerance and liquidity needs. Together, we can design your portfolio to weather any storms so you can remain focused on your long-term goals.