How to Keep Your Portfolio on Track During Market Turbulence

Recent tensions in the Middle East and rising oil prices have contributed to increased volatility in financial markets. Brent crude oil, a widely used global benchmark, has risen above $100 per barrel. Higher energy costs may place pressure on economic growth while also contributing to elevated prices for goods and services (inflation).

These developments add to existing areas of uncertainty, including the impact of artificial intelligence on business models, equity valuations, conditions in private credit markets, and monetary policy decisions by the Federal Reserve. Together, these factors may lead investors to reassess the positioning of their portfolios.

Alfred A. Montapert once wrote, “Do not confuse motion and progress.” Periods of heightened market activity can create the impression that portfolios require frequent adjustments. However, a core principle of long-term financial planning is that portfolios are typically constructed in advance to align with an investor’s objectives, time horizon, and risk tolerance. Such portfolios are generally intended to navigate a range of market environments, though they may still experience periods of loss or underperformance.

During uncertain periods, maintaining a disciplined, long-term perspective can be important. While short-term market movements may be difficult to predict, investors often focus on long-term goals when making investment decisions.

Market Pullbacks Are a Normal Part of Investing

Equity markets have experienced uneven performance this year, with the S&P 500 Index trading modestly below its prior peak as of mid-March. Market declines of this magnitude are not uncommon. Historically, markets have experienced periodic pullbacks over the course of a year, though the frequency, timing, and severity of such declines can vary.

For example, in prior years, markets have experienced multiple short-term declines while still producing positive annual returns. However, past performance is not indicative of future results.

Some investors may attempt to time market movements by exiting and re-entering positions. This approach involves risks, including the possibility of missing periods of market recovery. Historically, some of the strongest market gains have occurred during periods of heightened volatility, although this pattern may not persist in the future.

Pullbacks are a recurring feature of financial markets and should be considered when constructing an investment strategy. However, there is no assurance that markets will recover within any specific timeframe.

Bonds and Interest Rates in the Current Environment

Bonds remain an important component of many diversified portfolios. Their performance is influenced by several factors, including inflation, interest rates, and broader economic conditions.

Recent increases in oil prices have contributed to renewed inflation concerns. In addition, uncertainty surrounding Federal Reserve policy and leadership changes may influence interest rate expectations. Market forecasts currently suggest the possibility of limited rate adjustments this year, though actual outcomes may differ.

The Bloomberg U.S. Aggregate Bond Index, a commonly used measure of the U.S. bond market, has shown relatively muted performance this year. Treasury yields have fluctuated in response to changing economic and geopolitical conditions.

Following a period of significant declines in 2022, bond markets experienced improved performance in subsequent years. However, bond investments remain subject to risks, including interest rate risk, credit risk, and inflation risk.

Current bond yields are higher than those observed during much of the previous decade, which may offer increased income potential. Nevertheless, yields can change, and higher yields do not guarantee positive returns.

When comparing bonds to cash or cash equivalents such as certificates of deposit (CDs), investors should consider inflation, liquidity needs, and investment objectives. While cash investments may offer stability, their real (inflation-adjusted) returns may be limited.

Private credit markets have also drawn increased attention. These investments, which involve lending outside traditional banking systems, may offer higher yields but also carry additional risks, including reduced liquidity and limited transparency. Investors should carefully evaluate whether such investments are appropriate given their individual circumstances.

The Role of Diversification

Diversification—allocating investments across different asset classes, sectors, and regions—is a commonly used strategy to help manage risk. A diversified portfolio may reduce the impact of volatility in any single investment, although it does not eliminate the risk of loss.

Historical periods of market stress, such as the volatility experienced during 2020, illustrate that different asset allocations can produce varying outcomes. While diversified portfolios may experience smaller fluctuations, they can still decline in value.

Certain asset classes, including commodities, have recently performed strongly due to rising energy and precious metal prices. However, asset class performance can shift over time, and it is not possible to consistently predict which investments will outperform.

Rather than concentrating investments in a single area, many investors maintain diversified exposure to participate in a range of potential market outcomes. This approach may help balance risk and return over time, though results will vary.

Important Considerations

Market volatility driven by geopolitical developments and commodity price movements can be challenging for investors. While maintaining a long-term, diversified approach is a common strategy, there is no guarantee that it will achieve desired outcomes or prevent losses.

All investing involves risk, including the possible loss of principal. Investors should consider their financial situation, investment objectives, and risk tolerance before making investment decisions. Past performance does not guarantee future results, and forecasts are subject to change.