Volatility Guardrails for Uncertain Times
Amid tariff uncertainties, inflationary pressures and geopolitical strife, there is no shortage of market, macro and geopolitical risks to feed market volatility. Not surprisingly, those risks are prompting more investors to focus on downside protection strategies that may help limit portfolio drawdowns, while also allowing some participation in upside returns. In this piece, we look at several management approaches investors can consider, and discuss how to choose among them depending on your risk and return objectives.
In our 2025 Global Market Outlook, we wrote that we expected market volatility to remain a theme for the coming year. That conviction looks well placed; in the first three months of the year we have seen market volatility spike amid increased uncertainty around the future of the US exceptionalism in particular (Figure 1). Understandably, this has led investors to examine different strategies for downside protection.
The need for managing volatility is clearer than ever now. In a world where the outlooks for inflation and growth both seem challenged, and positive correlation between stocks and bonds has undermined portfolio hedging strategies that investors have long relied on, investors need to think about hedging in different ways.
In essence, investors must continue allocating to risk assets to achieve their return objectives, but also need to have strategies in place to manage volatility, as drawdowns (declines in investment value) can take a long time to recover from and can therefore undermine long-term outcomes.
Whether these downside protection strategies should be more strategic (a permanent part of the portfolio design) or dynamic (dialed up and down as needed) depends on risk tolerance. If the asset owner can withstand drawdowns, and patiently accumulate through the resulting recovery phases, then the added complexity of volatility management may not be necessary at all. For some, a moderate risk tolerance offers the ability to be more opportunistic in risk control. For others, a low tolerance for losses suggests the need to install some form of permanent shock absorber.
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To put volatility management into place, investors can take a wide range of approaches that can help smooth out performance even in periods of high uncertainty. Limiting losses during market drawdowns can help investors save “dry powder,” which they can then re-allocate towards riskier assets after the drawdown to benefit from rising returns.