Using Portfolio Diversification to Help Navigate Market Volatility

It’s certainly understandable if you’ve been feeling a bit rattled by the latest stretch of market volatility. As often as we’re reminded not to obsess over market moves on a day-to-day basis, it can be difficult to ignore concerns when stocks drop sharply.

We realize that assuring you stock market corrections are normal doesn’t make recent declines any less worrisome. But the truth is, market fluctuations are an inherent part of investing. The S&P 500 sees declines this big, or bigger, every year or so.

In our Octavia 2025 Outlook report, we pointed out the potential for higher volatility and a choppy market. Elevated valuations, intensified market concentration, and the risk of renewed inflation were among our top concerns. While we identified opportunities, we also acknowledged vulnerabilities.

The Benefits of Diversification

Diversification—allocating investments across different asset classes, geographic regions, company sizes and sectors—is the foundation of any smart long-term investment strategy. The goal is to strike the right balance between risk and reward, helping to cushion market downturns.

Of course, even this strategy isn’t immune to risk and volatility. There may be periods when your well-diversified portfolio outperforms the S&P 500, Dow, and other indices, and times when it underperforms. But over time, diversification can provide a smoothing effect, helping to reduce extreme fluctuations and deliver a more stable overall return.

For example, while the U.S. stock market has dropped in recent weeks, international markets are up. Stocks in Germany, France, the United Kingdom, and Hong Kong have outpaced the S&P 500 for the past six months. Additionally, there are bright spots among U.S. equities beyond the so-called  “Magnificent Seven” stocks that have been dominating the market for some time now. There are also plenty of alternative investments worth considering.

Reevaluating Your Risk Tolerance

If it’s been a while, this might be a good time to reassess your risk tolerance and have your portfolio stress-tested. You may find your allocation is no longer as moderate or conservative as you initially intended.

While taking on additional investment risk can potentially yield greater returns, it can also put your risk tolerance to the test during market downturns. If recent volatility has you feeling anxious about your financial future, you may want to consider making some changes.

That said, impulsively moving everything to cash and sitting out until market conditions improve can be counterproductive. For one thing, you could end up selling your investments for far less than you paid for them. Plus, there’s no knowing when the market—or your investments—will rebound. Timing the market perfectly is nearly impossible. You could miss out on some of the best days and negatively impacting long-term performance.

Rather than reacting emotionally, a more strategic approach is to create a portfolio mix that is designed to help maximize your potential returns while also managing risk effectively. We believe that establishing and committing to a long-term financial plan that fits your unique goals is the best way to navigate market fluctuations confidently.

We encourage you to review your portfolio diversification and reassess whether your asset allocation still matches your personal risk tolerance. Your Octavia wealth advisor can help you explore the many options available to broaden your portfolio mix. Please feel free to reach out—we’d be happy to discuss how a diversified blend of investments can help you mitigate risk and make the most of market opportunities.