11 March 2026

Financial markets stumble from time to time, and occasionally they fall. When they do, ‘volatility’ becomes the industry buzzword. Volatility refers to how much and how often asset prices change. For instance, if an investment’s price regularly moves 1-2% each day, it’s considered more volatile than an asset that moves just 0.5% daily. Riskier assets are naturally more volatile. The upside is that higher risk usually brings higher long-term returns. This is a key principle in finance: investors are paid to take risks.

That is why it’s important to diversify a portfolio across different asset classes. In a well-constructed portfolio, different assets react differently to economic events, which can reduce overall volatility. As Nobel Laureate Harry Markowitz famously said, “diversification is the only free lunch in investing.”

The first quarter of 2026 has seen some major changes in the global landscape. Initially, investors fretted over the extent to which Artificial Intelligence (AI) would disrupt the software services industry. More recently, geopolitical developments and the potential for market turbulence to fuel inflation in particular has been driving volatility.  

In the case of such geopolitical shocks, markets can move very suddenly. This leads to a surge in volatility as investors re-think the trade-off between risk and returns. Investors will rightly reason that assets with more vulnerability to the current crisis should be cheaper, given the risks they face. There will be winners too, and the goal of a well-diversified portfolio is to also capture these assets.

In the intense fog of uncertainty investors tend to want to play it safe. This is why selling during a crisis usually hurts performance - asset prices can quickly rebound when investors’ worst fears aren’t realised. Ahead of recent market volatility, there were reasons to be optimistic - AI was on course to lift productivity and interest rate cuts were easing the pressure on consumer spending - and these tailwinds could return if geopolitical risk diminishes and markets will likely recover from recent moves lower.  

In a perfect world, investors would sell just before market volatility hits and buy back when prices drop. But timing the market that perfectly is nearly impossible, even for seasoned investors. Making a habit of selling assets every time there’s market volatility or economic changes would be both risky and costly. Over time, staying out of the market for too long can hurt your portfolio, as markets tend to rise more often than they fall.

What can investors learn from this recent example of market volatility, and similar events in the past? First, as an investor, you are rewarded for taking risks. Don’t fear volatility; it’s the reason that assets provide higher returns over time. The key question to ask is whether market volatility changes your fundamental view of an asset. In most cases, the answer will be no.

Unless something fundamentally changes the value of an asset, it’s usually best to ride out the volatility as panicked markets often overreact. If you sell during the panic, you may not be able to buy back later at the same or a lower price, and you risk missing out when the market recovers. Finally, always have a diversified portfolio. Diversification works because it reduces risk while allowing for long-term returns at higher rates than cash. This brings us back to the basic point: investors are rewarded for taking risks.