Written by Tim Thomas and Katie Wham

Market volatility can occur for various reasons and can be uncomfortable without a solid plan and a well-designed portfolio. However, by creating a robust financial plan that acknowledges the inevitability of market corrections and building a resilient portfolio to weather market volatility, unpredictable times can be less stressful and, in some cases, beneficial, as opportunities often arise when stock prices decline. 

By their nature, financial markets are cyclical. Periods of investor enthusiasm and expansion inevitably give way to pessimism and contraction before a recovery takes hold, marking the start of the cycle anew. These cycles are not driven by a single factor but rather by a complex interplay among investor attitudes, corporate earnings, monetary policy, and other factors. Predicting and timing market cycles can be challenging, as recent events have demonstrated. 

Another factor that can drive market movements is government policy. Over the last several months, markets have oscillated between periods of bearishness and bullishness as our government has worked to negotiate more balanced terms of trade. For some investors, this volatility may be unsettling; however, by preparing for it in advance, investors can best position themselves to achieve their long-term goals.

High-Quality Companies, Long-Term Growth

Building a resilient portfolio begins by investing in resilient businesses. To some extent, all companies are impacted by the broader environment. But for some firms, operating success is largely independent of market cycles.

For these high-quality companies, performance is driven by factors that are independent of short-term market trends. An experienced and skilled management team, high barriers to entry, a focus on innovation, and a powerful consumer brand can create a strong competitive moat that remains intact even in a downturn. Conversely, low-quality businesses may rely on low-cost financing or speculative growth to sustain their share price. While these companies may give the appearance of success during market expansions, they are often the first to fall when the cycle turns.

Importantly, this focus on quality does not mean ignoring market trends altogether. For example, the recent artificial intelligence boom has undoubtedly resulted in the rapid growth of a few companies with questionable fundamentals. But at the same time, this technology has created genuine opportunities for some businesses to enhance their productivity or add robust revenue streams. Our role is to discern between hype and the actual potential benefits. 

No investor can be completely insulated from the impact of market cycles. However, by focusing on high-quality companies, the foundation is in place for a more robust and reliable path to long-term growth rather than chasing short-term trends. This commitment to quality and discipline is at the heart of our active investment philosophy. 

Active Management: Capitalizing on Opportunities 

Badgley’s portfolio approach is centered on the active selection of individual securities. While passive index funds can be efficient tools in specific market segments, they are often too imprecise for assembling a high-quality portfolio. Relying solely on passive investment funds can lead to unintentional overexposure to industries or risk factors.

Our experienced in-house research team identifies and analyzes opportunities customized to our clients’ specific objectives. This approach enables us to create highly personalized portfolios that are tailored to individual risk tolerances and financial goals. For example, we may recommend a lower level of exposure to the technology sector for a client working in the software industry and holding a concentrated position in their employer’s stock. 

This tailored approach also allows us to be opportunistic and use market movements to our clients’ advantage. When volatility rises, security prices can become disconnected from their fundamental value as investors sell in fear or panic. For the prepared investor, these moments can present rare opportunities to acquire exceptional companies at attractive prices.

Strategic and Tactical Diversification: Quality and Quantity 

Our pursuit of strategic diversification complements Badgley's focus on high-quality companies and active management. Strategic diversification manages risk across various factors, including asset classes, geographic locations, and company sizes. Because market cycles often impact different risk factors in unique ways, this allocation approach can help a portfolio better withstand volatile periods and respond more effectively to shifts in the market cycle.

Tactical portfolio positioning can add an additional layer of risk mitigation by enabling a quick response to market turbulence. Not only does this allow portfolios to shift to a more conservative posture when risk levels rise, but it also enables us to capitalize on buying opportunities as they emerge. In essence, tactical positioning allows investors to play both offense and defense. 

Conclusion: Expect the Unexpected 

A focus on high-quality companies, active management, and many forms of diversification are the pillars of our approach to navigating market cycles. The common theme is simple: being proactive.

By taking an active approach, investors can prepare for the inevitability of market cycles and avoid making reactive decisions that reduce their odds of achieving long-term goals. In fact, this preparation can even enable investors to benefit from volatility, given the buying opportunities that can develop during these periods. 

At Badgley Phelps, we believe the best time to prepare for volatility is before it occurs, not in the moment. While the current investment environment may feel unpredictable, our client's financial plans and portfolios are built to withstand and even capitalize on volatility.  

If you would like to learn more about our proactive approach, we welcome you to contact us at (206) 623-6172 or via email at info@badgley.com.