Because Exchange Traded Funds (ETFs) are traded on stock exchanges and are available across several asset classes, they too are exposed to the same market movements as ordinary shares and managed funds. While volatility is a natural part of market cycles, nobody likes seeing their ETF or investment portfolio fall in value. Sharemarket turbulence can lead to investors making panicked or rash decisions, but those who are successful remain composed and use downturns to reassess their position and search for opportunities to strengthen their portfolio.

Here are five key strategies successful ETF investors employ during volatile times:

1. Clear goals that shape investment strategy

The first step to any investment strategy starts with having a clear understanding of what you want to achieve and establishing a plan to reach it.

Whether it is building a retirement nest egg, saving for children, looking to buy your first apartment or family home, or any other wealth accumulation purpose, successful investors have a plan.

These goals are usually well defined, have step-by-step instructions and are recorded to give investors a reference point during volatile markets. For example, an instruction could be to create a stop-loss order on your ETF or other shares – this potentially limits your losses (or realises gains) by automatically selling when your asset reaches a pre-determined price.

By having clear goals and sharp investment strategies, investors are less likely to make impulsive decisions based on short-term market fluctuations. Instead, they remain focused on their long-term plans, adjusting their portfolios only when necessary.

2. Diversification: The shield against uncertainty

Investing in ETFs are a simple and potentially cost-effective way to spread your portfolio across different asset classes, specific sectors and geographic regions. Successful investors diversify their portfolio to mitigate the impact of a downturn in any single area.

It is tough to predict which asset class will outperform as nobody can accurately predict the future, but good investors ensure they are well-diversified to protect against sudden market movements.

3. Dollar-cost averaging: Regular top-ups spread the load

Dollar-cost averaging is common among successful investors because it aims to reduce the impact of market volatility. By investing a fixed amount regularly, you can average out the purchase price of your investment over time.

Here is an example:

Imagine you decide to invest about $100 in a particular ETF every month for six months. Here is how it might look:

• Month 1: ETF price is $10, you buy 10 units ($100)
• Month 2: ETF price is $12, you buy 9 units ($108)
• Month 3: ETF price is $8, you buy 13 units ($104)
• Month 4: ETF price is $11, you buy 9 units ($99)
• Month 5: ETF price is $9, you buy 11 units ($99)
• Month 6: ETF price is $10, you buy 10 units ($100)

 
After six months, you have invested $610 and purchased a total of 62 units. The average cost per unit is approximately $9.84, which is lower than the highest price you paid ($12) and higher than the lowest price ($8).

4. Long-term perspective: Patience pays off

Another key trait of successful ETF investors is to maintain a long-term perspective, especially during periods of volatility. These investors understand that markets over the shorter term can be unpredictable and trying to time the market can be near impossible.

If you invested $10,000 in June 1994 and tracked the S&P/ASX All Ordinaries Total Return Index (the top 500 companies in the ASX), you would now have more than $135,000¹. This is even though the market went through a dot.com bubble burst, the global financial crisis and most recently the COVID-19 pandemic.

By staying invested and patient, investors benefit from the compounding returns. This perspective allows them to ride out market downturns with confidence, knowing that over time, the market has historically trended upwards. Their focus remains on the long-term growth of their portfolio rather than short-term gains or losses.

5. Bear markets as opportunities for future gains

While a bear market can test an investor’s patience, those who have a successful mindset see it as an opportunity over a setback.

These investors believe long-term markets will continue to rise, meaning after a period of volatility there is usually a strong recovery. By remaining invested during the downturn and even adding to their portfolios when in a bear market, these investors position themselves to benefit as asset prices recover.

Moreover, bear markets provide opportunities to buy high-quality assets at lower prices, which can lead to significant gains when the market rebounds. Successful investors maintain their conviction during these periods, understanding that patience and a well-thought-out strategy will lead to strong returns.

This article is part of a comprehensive series by Janus Henderson designed to help investors make the most of ETFs. Stay tuned for more insights and strategies to expand your investment knowledge and optimise your portfolio. Learn more