When a stock you own falls heavily in value, the instinctive response is often emotional. Investors may feel compelled to act quickly, ignore the position altogether or convince themselves the lower share price automatically represents opportunity.
More often, however, periods of volatility are less useful as prompts for reaction and more useful as prompts for reassessment. The questions worth asking are usually broader: has the underlying thesis changed, have future earnings expectations deteriorated and does the valuation still appropriately reflect the quality of the business over the long term?
Volatility is normal. Your response to it matters.
Invariably, as long-term investors, we should expect volatility at both the broader market and individual stock level. A simple way to frame that expectation is to treat a 25%–35% peak-to-trough move within a 12-month period as a plausible, rather than exceptional, outcome for any individual equity. Across any given year, it is common to witness multiple meaningful market corrections alongside periodic single-stock dislocations.
Even the most carefully constructed portfolio must remain alive to the possibility that a position we own could fall materially for reasons ranging from deteriorating fundamentals to liquidity shifts, positioning, forced selling or changing market sentiment.
As Advisors and investors, we attempt to mitigate this risk through diversification, disciplined portfolio construction, careful stock selection and formal risk management frameworks. However, even with those protections in place, the risk itself can never be eliminated entirely.
That reality raises an important question: what should investors actually do when a stock they own falls heavily in value?
The instinctive response is often emotional. Investors might either panic and sell, freeze and ignore the position entirely or, alternatively, convince themselves the lower share price automatically represents an opportunity to buy more. In practice, none of these reactions are reliable investment strategies, in isolation, over the long-term.
Why single-stock swings are getting bigger
One feature of modern markets is that single-stock volatility appears to have structurally increased. The rise of passive investment strategies, High Frequency Trading platforms and leveraged hedge fund structures has altered the way capital moves through public equity markets. In many cases, this has reduced the depth of active buyers and sellers available during periods of market stress, particularly in more concentrated or less liquid areas of the market.
At the same time, information now travels globally and instantaneously, often amplifying short-term sentiment and positioning moves. The result is that individual stocks can now experience larger short-term price movements than many investors were historically accustomed to, even when the long-term fundamentals of the underlying business remain broadly intact.
Over the past 12 months alone, several well-regarded ASX companies have experienced periods of volatility despite retaining many of the characteristics that made them attractive long-term investments initially.
Two ASX examples worth examining
Cochlear Limited (COH), for example, experienced a meaningful de-rating as softer growth expectations, rising costs and questions around the cyclicality of demand began to challenge what had long been viewed as a relatively defensive growth profile. Quite quickly, the discussion shifted away from a single reporting period and toward a broader reassessment of the company’s long-term earnings outlook and valuation.
A similar example has emerged more recently with Brambles Limited (BXB). Operational issues within its US pallet network and a downgrade to earnings expectations resulted in a sharp share price reaction despite the company continuing to operate a large-scale global logistics platform with strong market positioning. Much of the market focus moved beyond the downgrade itself and toward whether previous assumptions around margins, capital efficiency and free cash flow were still appropriate.
These examples illustrate how share prices often move not only on current earnings, but on changing expectations and confidence around future outcomes. At times, those reactions may prove justified. At other times, periods of weakness can create a disconnect between short-term sentiment and longer-term intrinsic value.
A falling price is not the same as a failing business
A falling share price does not automatically imply a deteriorating business. Equally, a weaker share price alone is not evidence of value. Share prices often weaken for legitimate reasons, and a stock trading below a previous high is not necessarily mispriced.
Periods of share price weakness and volatility should prompt us to revisit first principles. Why do I own this position? Am I relying on fresh analysis, or simply repeating a narrative I have previously accepted? How confident am I in the durability of the company’s earnings, competitive positioning and management execution over my time horizon?
Ultimately, when a share price falls, investors are forced to confront a relatively simple question: what do we believe the business can sustainably earn over time, and what price are we prepared to pay for those earnings?
Markets can, at times, overreact to short-term disappointment. At other times, periods of weakness may accurately reflect deteriorating industry conditions, weakening earnings power or broader structural change within a business itself. For investors, the difficulty lies in distinguishing between temporary dislocation and a more permanent change in fundamentals.
Long-term investing is not about avoiding volatility altogether. Periods of weakness are an unavoidable part of owning equities and, at times, markets will move materially in either direction for reasons that may have little to do with long-term intrinsic value.
More often, investment outcomes are shaped by an investor’s ability to remain patient through those periods while continuing to reassess the underlying thesis.
Why diversification earns its keep in volatile markets
Many investors unintentionally become overly concentrated in individual stocks, sectors or investment themes, particularly following extended periods of strong performance. A position that initially represented a modest allocation may gradually become disproportionately influential within a portfolio over time.
Diversification, position sizing and ongoing portfolio oversight are therefore not merely defensive concepts designed to reduce portfolio volatility. They exist to improve the durability of long-term investment outcomes and reduce the likelihood that a single investment decision materially impairs overall wealth creation.
What our role as advisers looks like in practice
Markets today are increasingly noisy, short-term oriented and sentiment driven. Reporting seasons, central bank commentary, geopolitical developments and social media can all contribute to meaningful short-term price movements that may ultimately have little bearing on the long-term intrinsic value of an underlying business.
As Advisors, part of our role is helping clients maintain perspective during these periods, while ensuring portfolios remain appropriately diversified, risk-aware and aligned with long-term objectives.
Over longer periods, investment outcomes are often determined less by short-term prediction and more by an investor’s ability to remain disciplined when markets move.
Diversification, liquidity and position sizing may not attract much attention during rising markets, but periods of stress usually remind investors why they matter.
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Disclaimer: The content is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regard to these factors before acting or seek advice before making any financial decisions. Blue Rock Investments (Melb) Pty Ltd is the holder of an Australian Financial Services Licence (AFSL No: 335588).
