By ; Islam Tawfik

While staying invested through volatility is often the smartest long-term move, that doesn’t always mean doing nothing, say experts from global wealth management firm Janus Henderson. In a newly published guide to navigating market volatility, they show how strategically managing around a market decline can help cushion the ride and make it easier to stay the course.

“Markets rise and fall, often without warning, and those swings can feel unsettling – even though they’re perfectly normal. Every downturn can feel like this time is different, but history reminds us that, despite inevitable dips, markets have grown over time,” says Matthew Bullock, EMEA Head of Portfolio Construction and Strategy.

Market corrections, defined as a drawdown of 10% or more, have occurred frequently in modern times. There have been 56 periods since 1928 where the market has declined by 10% or more. Bear markets, which are defined by a drop of 20% or more, have occurred about once every 4.3 years. Put another way, if you invest over a 5-year period, it’s likely you will experience at least one bear market. Not every market drop signals a recession, but deeper declines have often coincided with economic slowdowns. When recessions do occur, the pain is more severe. Recessions extend both the severity and duration of market declines, which is why so much attention is paid to predicting when one might arrive.

Mario Aguilar De Irmay, Senior Portfolio Strategist, says, “Investors naturally look for signs of recession amid periods of volatility, but it’s important to remember that the markets are not the economy. Rather, they are forward-looking pricing mechanisms, which means they often bottom during recessions – not after. That’s why attempting to time investment decisions around market dips can lead to missing out on the recovery.”

What happens during and after market drawdowns

So, how should investors think about market drawdowns?  Understanding what happens during a market decline is only half the picture; what happens after can be just as important, say the experts.

First, investors should consider equity sector diversification as various parts of the market respond differently at various stages of a cycle. Defensive sectors like healthcare, consumer staples, and utilities have historically held up best during downturns, offering stability when markets are under stress. But as the tide turns, leadership tends to shift. More cyclical areas like financials, real estate, and technology often drive the rebound, benefiting from improving sentiment and economic momentum.

Another consideration is market capitalization. Often, investors are wary of small- and mid-cap stocks because they tend to be more volatile and can underperform during downturns. This is because smaller cap companies, which have more domestic exposure, less access to capital, and narrower business models, are generally more directly tied to the economic cycle. But that economic sensitivity often positions them for stronger rebounds once the recovery begins.

Finally, much attention should be paid to fixed income. Bonds can play a critical role in a portfolio by providing ballast during equity market drawdowns and offering a more stable source of return when volatility spikes. While not immune to losses, bonds – especially those with higher credit quality – have historically held up better than equities during downturns.

Diversifying across assets into bonds is not the only consideration, however; diversifying within fixed income also matters. “During the sell-off phase, government bonds and higher-quality credit tend to offer the most protection. But as the cycle turns, riskier segments like corporate credit often lead the way, alongside equities,” says De Irmay. “Managing through volatility with a clear framework can improve outcomes – but perhaps more importantly, it can help investors stay invested.”

The benefits of staying invested

What ultimately shapes investor outcomes are the cycles of gains and losses that play out over time, say the experts. History shows bull markets last longer and deliver far more than bear markets take away. The risk of incurring losses during a downturn is real, but the risk of missing out on the recovery is far greater.

“Often the best course of action is to work with a qualified professional investor and trust in the long-term strategy that has been carefully mapped out based on thorough research and planning. Sticking to a well-considered financial plan can sometimes mean resisting the urge to make unnecessary moves, understanding that inactivity can be a strategic decision in pursuit of achieving one’s investment goals,” Bullock concludes.