What we do during market volatility

Brad Holland


3 min read

A common question during turbulent market conditions is, “What can be done to protect our portfolios?” We have written on this extensively over the years and can offer three different perspectives: the market perspective; our Nutmeg customers’ perspective; and the perspective of Nutmeg’s investment team.

Pier out into stormy seas

The perspective from the markets

The market is uncertainty. It’s an abrupt statement, but you’ll not find a simpler – nor more accurate – description of financial markets. Perhaps a more familiar expression is “there’s no return without risk.” Financial regulators all over the globe promote another expression in all investment product marketing: “investor capital is at risk”.

So, the market perspective is that volatility (risk, uncertainty) is very much a part of the natural landscape. However, the story doesn’t stop there. Longer-term returns become more consistent; the higher the risk, the higher their long-term returns normally are. The return landscape “smooths-out” over time. Investment academics call this “time diversification” and it’s a concept well accepted by markets and regulators. We wrote a blog early in 2018 illustrating this concept. It showed how major losses can often occur within a calendar year – even when the full calendar year returns end up positive.

The perspective from Nutmeg clients

Experienced investors learn to love risk because they know that where there’s risk, over the long term, there’s return. Don’t take our word for it, check out this blog that shows what our investors do in response to volatility. It shows that after adjusting for normal, everyday withdrawals, the largest change that occurs is customers increasing their portfolio risk after a turbulent time.

The bulk of our questions during periods of volatility come from inexperienced investors, who have yet to learn the behaviours exhibited by the vast bulk of Nutmeg investors. And we don’t underestimate how difficult many people find it to learn these lessons.

But even experienced investors who invested just prior to market turbulence ask questions about what could have been done to prevent it. This category of investor has indeed suffered unfortunate timing. The usual response to their queries is to continue taking a long-term perspective. But we would also like to give some insight into what we do as professional investors actively managing our clients’ money during turbulent market conditions.

The perspective from Nutmeg’s investment team

To come back to the question at the start, “What can Nutmeg do to try and protect our customer portfolios?” For the fully managed portfolios, Nutmeg’s investment team actively manages the asset allocation across all ten risk buckets. At the low end of the risk spectrum, the questions we tackle mainly revolve around the prospects for bond markets, and at the top end, it’s all about how equity markets could perform. However, the truth is that nothing is independent in financial markets; all these questions are related. And it’s the role of the investment team to be methodically looking at market dynamics, economic data, government policy, domestic and geo-politics to understand the likely direction of bond and equity markets.

Nutmeg has developed its own tools for this analysis. Every month, we update and critically analyse 163 pages of proprietary chartbooks, six macroeconomic books covering the major economic and trade regions, and two books that document liquidity and investment factor frameworks. We employ two full-time risk professionals to understand the market exposures of each portfolio and how they correspond with team investment views. We have daily interactions between the four investment managers over unfolding news and market developments. We constantly test and challenge our underlying views and pay for independent research to avoid “group-think”.

We take a 6-12 months perspective, not getting unnecessarily caught up with current market noise. We certainly endeavour to smooth out our customers’ investment journey, but we don’t try to get rid of the volatility. That’s impossible. Remember, the market is volatility/uncertainty. To the contrary, we look through the volatility to whether our underlying investment thesis is holding. We take time out to investigate themes more deeply, to enhance our ability to interpret the medium-term outlook. If our view changes, we’ll change our fully managed portfolios. If we do nothing, that’s an active decision too.

In conclusion

Nutmeg is busy looking after its customers’ savings and investments. Our customers remain fully engaged with their investment goals and savings plans; some even raise their risk dial after significant market corrections. And the market is busy being the market; providing opportunities for capital gain for the patient and throwing up episodes of volatility to focus the mind of investors and investment managers alike.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

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Brad Holland

Brad is Nutmeg’s director of investment strategy. A veteran – 28 years at last count – in financial markets, he started his career as a professional economist at the Australian Reserve Bank. He now specialises in economic and financial market strategy within investment management. Brad studied post-graduate quantitative economics at the University of Queensland, Australia. Despite living in London for 20 years now as a naturalised British citizen, he’s still not quite ready to support England-v-Wallabies.


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