We all know the story.

Share markets around the world have witnessed sharp declines as rising oil prices, tightening interest rates and the US housing slump sent jitters through global financial markets.

Some newspaper stories would have us selling up, quitting the markets and hiding our cash under a rock until it all blows over. We asked Andrew Pease, Senior Investment Strategist at Russell Investments, for his perspective on achieving goals in volatile times.

Russell's approach

“In answer to the question ‘what is Russell doing about market volatility?’ it’s tempting to answer ‘not much’,” says Andrew. “That doesn’t mean we’re sitting back and relaxing – far from it. Rather, it reflects the fact that we saw this downturn coming and we prepared for it years ago.

“It isn’t magic,” Andrew is quick to clarify, “just many years of experience. We know that markets have always had their ups and downs, and will continue to do so in the future. We don’t know when the peaks and troughs will occur, just that they will, so we position our portfolios to weather turbulent times and to benefit from a long-term, strategic approach to wealth creation.”

Fundamental to Russell’s approach is diversification. It starts at the asset level, the spread of money across cash, shares, property and fixed interest. For example, although Australian shares have declined in value recently, returns from cash and fixed interest have risen and helped to offset some of the losses. Diversification also works within an asset class. Take the different sectors of the Australian share market. Falls from the financial sector earlier this year were buffered by gains from resources.

“The next layer of diversification is style,” explains Andrew. “Using shares as an example, market conditions sometimes favour growth stocks, and at other times the reliable cash generators such as banks and utilities do better. By combining multiple styles within the portfolio, we smooth out some of the bumps.”

That leaves manager selection. “A major part of our effort goes into constantly researching an enormous number of investment managers,” says Andrew. “We monitor over 8,000 managed funds, and from those we select less than 50 to look after our members’ savings.”

Over to you

That's our long-term approach, but it will only work if you stick to your strategy. Log on to SuperSolution through our website to check your current investments and consider the points below that might help you during periods of downturn.

1. Markets recover. History tells us that the markets have always recovered from periods of downturn and gone on to reach new highs. So, if you stick with your strategy and don't panic, your investment will be well positioned to benefit from any future upturn.

2. Expect negative returns from time to time. If you have invested to achieve higher returns over the long-term, it's completely normal for there to be periods of negative returns along the way. As a broad guide, investors with a diversified portfolio of assets, including shares, fixed interest, property and cash, can expect a negative return once every five years.

3. Don't ‘time’ the market. When markets start to recover, they can move a long way in a short period of time. A number of studies have shown that missing the best few days in each year can significantly reduce returns. For example, missing the Australian share market's best 20 days over the 10 years from 30 June 1998 to 30 June 2008 reduced returns from 197% to just 61%!*

As you can see, a period of market volatility is not all doom and gloom – there are upsides. By staying focused on your long-term goals and considering the potential investment opportunities available, you can keep the current market conditions in perspective.

*Based on ASX All Ordinaries movements over the period indicated, as analysed by Russell Investments