Business as Usual: Navigating Volatility

Investors love the rush of making money. It’s a signal that they were right, and that feels good. But rarer is the investor who’s genuinely ready for the darker, less enjoyable side of investing; navigating market sell-offs. Like we’ve witnessed in the past few weeks since the US and Israel attacked Iran.

It’s at times like this when investors either stick with their investment plan to their benefit, or ignore it to their detriment. It’s during moments like this that investors either become scared by volatility, or view it as a rare opportunity to accumulate quality assets at discounted prices.

An Acquired Taste

Market weakness is uncomfortable by design. Stock prices fall, the market narrative darkens, and investors’ instinct to ‘wait for clarity’ becomes overwhelming.

Yet history shows that the most attractive long-term entry points rarely feel safe during the moment.

In truth, market bottoms are processes, rather than signposted events. This is why investors waiting for a definitive turning point typically miss the opportunity altogether.

But here’s the key point that most successful investors understand: volatility creates a fertile hunting ground rather than a reason for jumping to the sidelines.

The Reality of Equity Investing

There’s a crucial but often ignored fact about investing in equity markets: markets spend a meaningful portion of time below prior highs. Rather than being anomalies, drawdowns of 10% to 20% are structural features of equity investing.

As Mark Fonville from Covenant Wealth Advisers explains: ‘Since 1980, declines of 5% or more have occurred an average of 4.6 times per year, meaning investors should expect several meaningful dips annually. Corrections of 10% or more have occurred approximately every 1.2 years over the same period.’

The ASX 200 is no exception. Over the past two decades, it has endured multiple corrections, including the COVID shock in 2020, the inflation-driven sell-off in 2022, and the recent selloff in response to the war in Iran.

Yet the long-term trajectory for global markets, including the ASX, remains upward.

Investors who deployed capital during each of those previous sell-offs benefited from the subsequent recoveries as market conditions stabilised. Crucially, those recoveries began before economic conditions normalised. Waiting for confirmation that everything was going to be okay would have meant missing a significant portion of the rebounds.

This is why investors who treat weakness as an aberration to be avoided are almost always wrong-footed. They ignore the reality that it’s usually darkest just before the dawn.

For example, at market lows:

• The news headlines tend to be overwhelmingly negative;
• Earnings expectations are often being revised down;
• Liquidity is usually lower than normal, which serves to amplify the volatility;
• Most investors are bearish and this peer behaviour reinforces broader pessimism;

There’s an absence of emotional validation for buying when the rest of the herd is selling.

The existence of these challenges is precisely why volatility creates opportunity. If everything were positive, the market would almost certainly not be gifting you the chance to buy great assets at lower prices.

The absence of comfort is the signal that a market sell-off is an opportunity in disguise.

Where the Opportunities Are Emerging

So where are the current opportunities created by the recent volatility?

There are arguably a few standout asset classes at this juncture:

- Australian Small Caps

Australian small caps have lagged their larger peers amid higher interest rates and tighter financial conditions. This has compressed their valuations, particularly for companies with long-duration earnings profiles.

As a result, the dispersion between large and small cap valuations is currently elevated by historical standards despite the structurally higher earnings growth potential on offer.

This could be an opportunity for investors. Historically, periods of underperformance in small caps have been followed by strong rebounds once financial conditions stabilise.

Australian small and mid-cap funds and ETFs offer exposure to this opportunity.

- Global ETFs and Funds with Tech Exposure

By virtue of their broad-based diversification, global equity funds and ETFs provide access to the global opportunities that emerge during a sell-off like we’ve witnessed of late.

For example, the big US tech stocks that hold large weightings in most global ETFs have underperformed in recent weeks. For many of these stocks, their earnings estimates remain robust, so this is arguably an opportunity for global thematic funds and ETFs focused on technology, and for global funds and ETFs with solid exposure to the sector.

Investors using diversified global equity funds and ETFs can incrementally add exposure during market sell-offs without needing to time individual stock purchases.

- Listed Infrastructure

Infrastructure assets have been particularly sensitive to bond yield movements in recent weeks. Rising yields have pressured valuations, even where cash flows remain stable and inflation-linked.

Infrastructure funds and ETFs offer exposure to assets such as toll roads, utilities and energy networks, many of which benefit from long-term, inflation-protected contractual revenues.

The current dislocation between price and underlying cash flow stability is a signal that the sector is rich with opportunity.

Process Over Prediction

Navigating volatility is simple but hard. The name of the game is prioritising your process over your emotions.

A robust process to achieve this typically includes:

- Staggered Allocations

Rather than attempting to identify the market bottoms, deploying capital progressively during periods of market weakness is an effective means of reducing timing risk. It also helps investors avoid the all-or-nothing thinking that tends to be reactive rather than proactive.

- Valuation Anchoring

Whilst market sentiment is a useful guide during market sell-offs, investment decisions should be based on relative and absolute valuation metrics. When assets trade below historical averages or intrinsic value estimates, they should enter the opportunity set. Let the numbers guide you rather than your or the market’s emotions.

- Asset Quality Focus

It’s also worth being aware that not all market declines are opportunities. It’s important to distinguish structural impairment from cyclical weakness. Investing in high-quality funds and ETFs with diversified exposures reduces this risk.

- Liquidity Discipline

Finally, don’t forget the importance of liquidity. Maintaining a solid cash weighting during strong markets enables redeployment at discounts during weaker periods. Without liquidity, you can’t utilise volatility as a tool in your armoury.

Business as Usual

Navigating volatility is a normal part of investing. With staggered buying, valuation discipline, a quality focus, and liquidity discipline, you can use it to your advantage without worrying about precisely timing market bottoms. And by using funds and ETFs to your advantage, you can efficiently target the sectors and regions where the opportunities are on offer without the need for stock research.

By embracing the discomfort, periods of market weakness like we’ve witnessed in recent weeks are opportunities to be harvested.

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.