Market volatility is an inevitable part of investing, but that doesn't mean you have to watch helplessly as your portfolio value fluctuates. When markets decline, it is usually driven by underlying economic circumstances that cause investors to worry that profits will fall, reducing stock prices and increasing yields on fixed income (note: in general, fixed income prices go down as yields rise, and vice versa). These circumstances might include forecasted economic slowdowns, recessions, or other shocks to the system that brings about negative economic impacts, such as surges in interest rates, trade wars, or geopolitical upheavals.

These circumstances typically pass as the conditions that brough them on fade or are overcome, and investors feel confident again in the future to buy and hold stocks and other financial investments. Fortunately, history has shown that down markets and volatility tend to pass rather quickly, and investors are rewarded for their patience.

Historical perspective: Understanding market cycles

Before diving into portfolio protection steps you can take, it's helpful to understand market cycles. Historical data reveals a clear pattern in market behavior (these examples primarily use S&P 500 Index results, but the outcomes are similar to the performance of the S&P/TSX Composite):

Bull markets (upward trends):

Note: A bull market is defined as an increase of 20% or more from the previous market low.^3,4

• Average length: 4.3 years
• Average return: +149.5% (cumulative, total return)
• Occur more frequently and last significantly longer than bear markets¹

Bear markets (downward trends):

Note: A bear market is defined as a decline of 20% or more from the most recent highs.^3,4

• Average duration: 11.1 months
• Average decline: -31.7% (cumulative, total return)
• Occur approximately once every 7 years since 1929, with 13 recorded instances^1,2

To add to the encouraging news, recovery periods historically show remarkable strength and deliver strong returns (the below are cumulative, total returns median returns of the S&P 500 Index):

• 1-year after a market bottom: +121.4%
• 3-years after a market bottom: +117.7%
• 5-years after a market bottom: +287.9%²

For context, the most severe bear market in modern history occurred during the Great Depression (1929-1932), lasting 33 months with an 86.2% decline. However, even after this historic downturn, the market demonstrated its resilience with strong recovery returns.²

This historical data reinforces an important point: while market declines are inevitable, they are typically shorter than bull markets, and have consistently been followed by substantial recoveries. Understanding this can help investors maintain perspective during volatile periods, and avoid making emotional decisions that could harm their long-term investment success.⁵

5 “shields” to help protect your portfolio against market volatility

Here are five “shields” or steps to help fortify your investment portfolio during volatile and turbulent times and help you feel confident about reaching your long-term goals

1. Review your investment plan

Before making any changes to your portfolio, take a step back and assess your investment goals and timeline. Are you investing for retirement in 20 years, or do you need funds in the next five years? Your investment horizon should guide your strategy.

Consider your goals. If your goals haven't changed, resist the urge to make dramatic portfolio changes based on short-term market movements. However, if your circumstances have shifted, now might be the time to discuss adjusting your investment mix accordingly with your Investment Advisor.

2. Embrace diversification

Diversification has often been described as “the one free lunch in investing.” Why? Because it has historically been shown to deliver more consistent returns with lower volatility over time for long-term investors. And think beyond just stocks and bonds – research shows that portfolios incorporating multiple asset classes have demonstrated better resilience during market volatility⁶.

Consider:

• Geographic diversity: International markets, particularly in developed regions like Europe and Japan, can offer opportunities when U.S. or Canadian markets struggle
• Sector variety: Spread investments across different industries to reduce company-specific risk
• Size diversity: Mix large, medium, and small-cap companies
• Asset class diversification: Include bonds, real estate investment trusts (REITs), and other alternative investments that align with your risk tolerance

3. Focus on quality investments

During volatile periods, high-quality investments often demonstrate greater stability. Look for:

• Companies with strong balance sheets and consistent cash flows
• Businesses with competitive advantages in their markets
• Stocks with histories of maintaining dividends through market cycles
• Investment-grade bonds from reliable issuers

And keep in mind that quality doesn't always mean expensive. Many well-established companies trade at reasonable valuations, especially during market downturns.

4. Build income streams

Creating multiple income sources can help offset market volatility, while reducing or eliminating the need to sell assets to generate cashflow when those assets may be at depressed price levels:

• Dividend-paying stocks: Focus on companies with sustainable payout ratios and strong dividend growth histories
• Fixed-income investments: Consider a ladder of bonds with different maturities
• Alternative income sources: REITs and preferred stocks can provide additional income streams.

The key is selecting investments that can maintain payments even during challenging economic conditions.

5. Maintain strategic cash reserves

Having adequate cash reserves serves multiple purposes:

• Provides financial security during uncertain times
• Allows you to cover expenses without selling investments at inopportune moments
• Creates opportunities to invest when markets decline and valuations become attractive

Consider maintaining 6-12 months of living expenses in easily accessible accounts, plus additional strategic cash for investment opportunities.

We’re here to help!

Market volatility, while unsettling, often creates opportunities for long-term investors. The key is maintaining a disciplined approach aligned with your investment goals.

Remember that these strategies work best as part of a comprehensive investment plan developed in consultation with your RBC Dominion Securities advisor, rather than reactive moves during market stress. Contact your advisor to ensure your portfolio is properly positioned for both current market conditions and your long-term objectives. They can help you implement these strategies while considering your specific circumstances, risk tolerance, and investment goals.

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Sources

• ¹First Trust Advisors (2025). "Historical Bull & Bear Markets Analysis." First Trust Portfolios Market Research.
• ²Winthrop Wealth (2025). "S&P 500 Bear Markets: Historical Perspective." Winthrop Wealth Market Analysis.
• ³Vanguard Group (2025). "Understanding Bull and Bear Markets." Vanguard Market Research.
• ⁴LPL Financial (2025). "S&P 500 Market Analysis Report." LPL Financial Research Blog.
• ⁵Guggenheim Investments (2025). "S&P 500 Historical Trends Analysis." Guggenheim Market Research.
• ⁶Vanguard Group (2024). “Building resilient portfolios through diversification”. Perspectives: Markets & Economy.

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