The first quarter of 2022 has challenged investors with plenty of market volatility, and it would be foolish to expect the rest of the year to be a smooth ride.

If recent fluctuations in the share market are giving you heartburn, your risk appetite and your portfolio’s asset allocation are probably misaligned and in need of attention.

Most financial headlines focus on the here and now. But for investors, attempting to make decisions based on daily developments, making frequent portfolio adjustments and trying to time the market does not help accumulate wealth over the long run. It typically has the opposite effect.

Rather, it is the asset allocation decisions you make and stick with year on year that will drive solid long-term investment outcomes.

If you are losing sleep over how your portfolio will be affected by the day’s headlines, take a moment to reflect on how your portfolio matches your investment goals and risk appetite.

While the concept of putting together a stable mix of investments that helps weather the peaks and troughs of the share market can be daunting, its actually simple – it’s discipline that matters during these periods of market volatility.

This is where the core-satellite portfolio approach may help. The core-satellite approach is about allocating the core of your portfolio – about 80-90 per cent – to broadly diversified index funds or ETFs, and the remainder to active funds or an active strategy.

This combines the best aspects of both strategies – low cost, broader diversification, tax efficiency and lower volatility for the stable indexed core, and the pursuit of outperformance in your active satellite.

The core portfolio should be as diversified as possible, holding a mix of stocks, bonds and other assets across a variety of geographies, sectors and industries.

Index funds or ETFs can fill this role, holding hundreds or thousands of individual securities and minimising the chance of any specific one affecting its overall performance.

Your whole portfolio should also match your risk profile. If you’re investing for a home deposit in the near future, or if you’re close to retirement, then investing more conservatively to reduce the chances of near-term portfolio losses should be considered.

But if you’re far from retirement or an obvious need to use the investment funds, it makes sense to focus on delivering high growth.

Getting the core portfolio aligned to your risk profile is the key to a good night’s sleep and the investment options at your fingertips put that well within reach of every investor.

But don’t forget that your core portfolio may require rebalancing back to its target if the market moves drastically or if your risk profile shifts over time.

While carving out a small portion of your portfolio for active investing in the satellite portion isn’t backed up by academic studies, it may be helpful to some behaviourally.

It could help you avoid tinkering with the core and free up the satellite portion to pursue other opportunities – whether that’s an interest in stock picking or sectors or other elements you feel strongly about.

If doing it yourself sounds a little too complicated, diversified funds (which offer ready-mixed portfolios of stocks and bonds) are a great core option.

Most fund managers offer diversified funds and ETFs ranging across the risk spectrum from high growth (where a portfolio is 90 per cent in equities and 10 per cent in bonds) to conservative funds (where 70 per cent is allocated to bonds and only 30 per cent in equities).

Many investors aspire to have their portfolios consistently outperform the market averages but, as history has shown, it is much harder than most people think.

A well-diversified core portfolio, aligned to your risk appetite, will help spread your risk and afford you a margin of safety over the long term.

Get this right and keep the restless nights at bay.

While you can afford to not be the best investor in the world, none of us can afford to be a bad one.SI

Duncan Burns is chief investment officer for Vanguard Asia Pacific.