Why strategy matters more than forecasts

As part of our work as portfolio managers, the question we are asked most often is “Where will the market go in the coming months?” It is a question that investors at every level understandably ask themselves, especially during uncertain periods like the one we are experiencing today. The problem is that no one knows the answer with absolute certainty, because markets, by their very nature, are unpredictable.

So how can investors succeed in this environment? And does it make sense to build and manage a portfolio under these conditions? We believe it does. Especially in uncertain times, risk management and a clear strategy remain the most effective way for most investors to approach financial markets. In this article, we explain why.

Unpredictability does not mean flying blind

Let’s start with a basic premise the fact that markets are unpredictable does not mean there are no ways to assess risks, analyse different phases of the cycle and make informed economic decisions. Within the Asset Allocation team, a large part of our work involves analysing markets and the tactical positioning of portfolios. The result of this analysis informs decisions such as should we favour European equities or US equities? Commodities or bonds?

At the same time, we are aware that we cannot predict with certainty what will happen tomorrow, when markets will correct or when new developments will shift valuations. For example, we can incorporate geopolitical risk into our decisions, evaluate scenarios and analyse how past international crises have affected market performance. What we cannot do is know exactly when the next conflict will break out, how long it will last or what its outcomes will be.

When ancient navigators set out on their journeys across the seas, they could not predict exactly when they would encounter storms. Yet this did not mean they relied on chance. Over time, by studying the behaviour of the seas, they developed methods, routes and conventions that helped limit — though never eliminate — risk. The Phoenicians knew that the eastern Mediterranean was relatively safe during the summer months, while in autumn the Etesian winds changed character and crossings became more dangerous. The Romans captured this knowledge in the concept of mare clausum, or “the closed sea” from November to March, no military or merchant ship would undertake long voyages. These conventions created a reasonable expectation of success, making sea travel viable.

Investment planning follows a similar logic. We cannot predict the precise direction of markets, which is why we rely on an investment philosophy built on years of research and experience — a method designed to optimise long-term returns while limiting risk when markets turn negative. This is the essence of our service and, in our view, one of the main advantages of professional portfolio management.

When everything is going well, who thinks about risk?

When explained this way, such an approach may seem perfectly logical. Yet during periods of positive market performance — which historically are the majority — risk often stops feeling like a real concern, and the benefits of investing with a strategy and a diversified approach can be taken for granted. These are the moments when advice from experts, or self-proclaimed experts, tends to proliferate “Put everything in that ETF” or “Buy this equity index and watch the returns accumulate.” In many cases, however, the instruments being recommended are simply those that performed best in the previous year.

Keeping strategies simple is certainly important, and for some investors managing their own investments may be the best choice. But for most investors the reality of markets is more complex. Markets do not move in a straight line, and negative phases — if managed poorly from either a financial or emotional perspective — can have long-lasting consequences for personal wealth.

The emotional roller coaster

When a market correction arrives, investor sentiment can change dramatically. Suddenly it feels as though there is no safe place left, and the instinct is to limit losses. The perfect storm hitting markets appears to be driven by entirely logical and predictable factors. How was it possible not to see it coming?

In these phases, the temptation to exit the market is strong. It is a human reaction — understandable, but almost always the wrong one. Leaving the market during a downturn can turn a temporary loss into a permanent one. And then the next question arises when is the right moment to re-enter? Investors risk making two mistakes instead of one.

Trying to limit damage in anticipation of volatility is also extremely difficult. The risk scenario that appears obvious today likely looked equally plausible a year ago. Acting too early could have resulted in missed gains that might ultimately damage long-term returns more than the losses one was trying to avoid.

These mistakes, stemming from a lack of strategic discipline, can be costly. The so-called behavioural gap refers to the difference between the returns investors actually achieve and the returns they would have obtained had they simply stayed invested. The numbers are striking according to the report Mind the Gap 2023 – Investor Returns Around the World, European investors lost between 18% and 27% of total returns over the period 2013–2023 due to emotionally driven investment decisions.

How, then, can investors navigate this emotional roller coaster? Not by trying to anticipate market movements, but by focusing on what can actually be controlled through portfolio management and asset allocation not performance, but risk exposure; not returns, but the level of volatility an investor is able to tolerate.

Our philosophy, explained simply

This principle is the foundation of the investment philosophy we have developed at Moneyfarm. Our approach is built around two key pillars

• Understanding the appropriate level of risk for each investor. In other words, identifying the level of volatility and potential loss that is compatible with an investor’s objectives, time horizon and personal circumstances.
• Building diversified portfolios, including assets designed to keep expected volatility within levels consistent with the investor’s needs.

Both principles must be confirmed and maintained over time through continuous monitoring and regular updates. Choosing to rely on a professional investment manager means being guided through all of these aspects, while also receiving support with the operational and technical elements of portfolio management.

The multi-asset portfolio the core of our approach

How do we manage portfolio risk in practice? This is a part of our work that often goes unnoticed, yet it absorbs a significant portion of our time and energy.

The answer is diversification. In practical terms, this means constructing and managing a multi-asset portfolio that intelligently combines equities, bonds, commodities, cash and other instruments in carefully calibrated proportions to achieve a balance between growth and risk control.

Why does it work? The answer lies in the correlation between asset classes. During periods of market stress, not all asset classes move in the same direction or with the same intensity. When equities fall, government bonds often rise or at least remain stable. Gold may behave differently from equities. This lack of correlation is the true protection offered by diversification it does not eliminate losses, but it helps cushion them, making the investment journey far more manageable.

Looking at historical data from 1999 to today, a well-constructed multi-asset portfolio has shown a crucial characteristic compared with a purely equity investment, it has produced comparable returns with generally lower volatility. Maximum losses, measured by drawdown, have also consistently been lower for the multi-asset portfolio. In recent years equities have experienced periods of strong outperformance — 2023 and 2024 in particular were exceptional years for stock markets. Over longer time horizons, however, balanced portfolios have historically demonstrated the ability to reduce volatility while supporting long-term wealth growth.

As we have explained, for most investors it is not only the final outcome that matters, but also the path taken to reach it. We cannot know whether diversification will outperform strategies focused purely on maximising equity growth in the years ahead. What we do know is that diversification has historically been associated with a better balance between risk and return over the long term. For this reason, we remain committed to our method and our strategy.

Why Moneyfarm?

Over the years, we have navigated challenging market environments periods of significant uncertainty, unexpected macroeconomic shocks, geopolitical crises and even a global pandemic. Through all these phases, the multi-asset portfolio has proven capable of protecting and growing the wealth of our investors over time.

We firmly believe that controlling volatility is essential and that it remains an underestimated factor for many investors, especially those investing without a structured plan. In a narrative that often focuses almost exclusively on returns, we emphasise the concept of risk-adjusted returns. Our goal is not simply to maximise performance in the medium term, but to create value within a framework of controlled volatility. This is one of the central pillars of our investment approach.

Finally, we are specialists in this type of solution. Over the years we have developed and refined our methodology through continuous investment in research, technology and talent. The construction of multi-asset portfolios is the result of rigorous work based on data, quantitative models and a long-term perspective that always places the client’s interests at the centre.

Markets will continue to be unpredictable. But with the right method, intelligent diversification and a trusted partner, navigating uncertainty becomes not only possible, but considerably more reassuring.

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.