Financial markets have an ability to test investors' emotions. A sharp market sell-off, unsettling headlines, or heightened geopolitical tensions can quickly create the impression that risk has suddenly increased. Yet, while you may recognise that volatility has risen, true investment risk has not necessarily done the same.
Volatility refers to the day-to-day fluctuations in asset prices. Markets rise, fall and occasionally move sharply in response to economic data, political developments or changes in investor sentiment (this is even more evident in the environment we have experienced in the last couple of years). These movements are highly visible and often dominate headlines. However, price movements alone do not determine whether an investment has become more or less risky.
True investment risk is the possibility of a permanent loss of capital (or failing to achieve your long-term financial objectives). While volatility can feel uncomfortable, it is often temporary, but permanent capital loss can have a lasting impact on wealth creation.
The difference is important because investors frequently respond to volatility as though it were risk. During periods of market stress, the instinct to move to cash or outright sell can feel like the safest course of action. Yet history has repeatedly shown that impressive market recoveries occur after periods of extreme, heightened uncertainty.
Let us concentrate on just the last 10 years for illustrative purposes. The below table highlights some market events and related metrics for the MSCI World Index:
| Market Event | Approx. Maximum Drawdown | Time to Recover Previous High |
|---|---|---|
| 1. COVID-19 | -34% | ~5 months |
| 2. Inflation & Rate Shock | -26% | ~14 months |
| 3. Higher-for-Longer/Rising Yields | -11% | ~1 month |
| 4. US Tariff / Policy Shock | -17% | ~2 months |
Source: 36ONE, Bloomberg.
Importantly, the 36ONE Prescient QI Hedge Fund has remained resilient through periods of significant market volatility, with limited drawdowns and a strong focus on capital preservation. This is a direct reflection of the emphasis we place on risk management and downside protection.
Investors who sell in response to short-term volatility often risk locking in losses and missing the subsequent recovery. This is where investment discipline becomes critical. Rather than reacting to every market movement, successful investors focus on understanding what has changed fundamentally: has the long-term outlook for a business deteriorated, or has its share price simply become more volatile? These are very different questions and often lead to different investment decisions. In fact, volatility can create opportunities. When uncertainty increases, markets can become overly pessimistic, causing high-quality businesses to trade at attractive valuations; this may provide opportunities to increase exposure to quality assets at prices that offer a greater margin of safety.
This perspective requires a different mindset: instead of asking "How do I avoid volatility?", rather ask, "Am I being adequately compensated for the risks I am taking?" Recognise that some degree of market volatility is unavoidable and, in many cases, necessary to generate attractive long-term returns.
Managing risk involves understanding businesses, assessing balance sheets, evaluating management teams, considering macroeconomic scenarios and carefully sizing portfolio positions. Every investment decision should be made with both potential returns and downside risks in mind. It is about identifying where risks are misunderstood, avoiding situations where permanent losses are likely, and ensuring that no single investment has the potential to derail a portfolio. This is the investment philosophy at 36ONE, where risk management and downside protection sit at the heart of what we do.
The most successful investors are not those who avoid volatile markets, they are those who remain disciplined when volatility inevitably arrives and stay the course.
Markets will always fluctuate. Headlines will continue to create uncertainty. Volatility is an unavoidable feature of investing, not a flaw in it.
The real challenge is distinguishing between temporary market noise and genuine threats to long-term capital. Ultimately, great investing is not about predicting the next headline, it's about managing risk thoughtfully, remaining patient through periods of uncertainty and allowing time, discipline and compounding to do the heavy lifting.