How to build a resilient investment portfolio for uncertain times

How to navigate market volatility to safeguard your investment portfolio

The term ‘living in uncertain times’ has become a constant refrain, especially in the post-Covid-19 era. The recent years have been filled with unexpected news and events. Just the recent quarter saw heightened volatility due to multiple factors including the impact of Donald Trump's presidency, geopolitical tensions, China's stimulus plan, et al. I believe uncertainty is not a new phenomenon, we have always lived in uncertain times. Every major event arises from a web of interdependent factors, making absolute predictability impossible.

For investors, this constant uncertainty translates into broader ranges of possible outcomes, especially in stock markets. This often leaves investors feeling anxious and directionless.

To navigate the unknown, investors can rely on three guiding principles:

1. Be cautiously optimistic

2. Use dynamic allocation to make your portfolio future-ready

3. Show patience, courage and conviction

Also read: Invested Rs 1 lakh in stocks, debt, gold, real estate in Jan 2024? Check how your money has grown

Be cautiously optimistic 

Optimism is essential for success, but pairing it with caution ensures preparedness. Many of the world’s most successful investors, like Warren Buffett and Howard Marks, were well-prepared for the Covid-induced market crash.

It was not by predicting its timing but by employing strategies that shielded their portfolios from shocks. The key lies in recognising market cycles and leveraging historical lessons to prepare for eventual downturns. These investors don’t fight market forces, they harness them.

The promise of higher returns has resulted in many investors gravitating toward smallcap, midcap, sectoral and thematic funds in the last few years. However, focus on large, value-driven equity portfolios is also important.

Also read: SGBs discontinued in Budget 2025: What’s the best way to invest in gold now?

Use dynamic allocation to make your portfolio future-ready

Smart investors are very careful about market valuations (prices) and investor behaviour. They know that human behaviour leads to extreme prices in the stock market – both on the upside and downside, and they are prepared to take advantage of such irrationalities.

How are they prepared for that? They use the principle of margin of safety – buying stocks at prices below their intrinsic value (fair value) to reduce downside risk while maximising upside potential.

For everyday investors, calculating intrinsic value can be challenging. I will recommend a simple tool like the long-term price-to-earnings (PE) ratio. For example, the 15-year average PE ratio for India’s Sensex is around 19-20x.

Historically, the PE has hit peaks of 28-30x and troughs of 10-12x during market cycles. Investors can gradually reduce equity exposure when the PE ratio rises above 21x and increase it when it falls below 18x according to their risk profile.

New investors may not be aware but equity markets have corrected by more than 50 percent many times in the past and can go through similar volatility in future as well. Of course, nobody can predict when and by how much. Therefore, equity allocation in the portfolio should be maintained in a range after accounting for the maximum downside volatility one can bear.

The key takeaway is the importance of having a well-thought-out allocation plan that accounts for market cycles and avoids emotional, ad-hoc decisions. Successful dynamic allocation over time can lead to long-term compounding returns, often outperforming benchmarks by 5-10 percent annually.

Research shows that asset allocation contributes to 80-85 percent of portfolio returns, while individual scheme selection accounts for only 15-20 percent. Yet, many investors spend disproportionate time chasing the best mutual funds or stocks instead of focusing on optimal asset allocation.

Demonstrate patience, courage and conviction 

Patience and courage are rare traits, and so is the club of successful investors. I have observed even intelligent people who initially refrained from equity investments due to high valuations, eventually succumbing to the psychological pressure of watching their peers reap gains. Unfortunately, this loss of patience often leads them to invest at market peaks leading to disappointments.

Having a conviction in a strategy and the patience to stick to a plan—even when it requires going against the herd—demands mental strength and a calm temperament.

The writer is Co-Founder & CEO, Truemind Investment Adviser 

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.