Staying calm in volatile markets

17 March 2022

4 minute read

Have the geopolitical and economic upheavals of recent months tested your resolve when it comes to your investments? Find out how revisiting your goals, looking beyond the short term, and positioning for volatility can help ­you reduce the financial (and emotional) impact of market downturns.

Investors have had a bumpy ride so far in 2022, after almost two years of relative calm. Worries about inflation, rising interest rates, and more recently, the conflict in Ukraine, have driven some sharp swings across financial markets.

Periods of market volatility can feel unsettling, but it’s important to remember that they are an inherent part of investing, especially for riskier assets like equities. Stock markets tend to experience corrections (a decline of 10% or more) once every 18-24 months, but have always resumed their upward trend longer term as companies and economies adapt to changing conditions.

Always look beyond the short term

Over the past decade alone, we’ve seen strong market sell-offs in response to a variety of developments, including the COVID-19 pandemic, Brexit, US-China trade tensions, US elections, changing interest rate expectations, the downing of Malaysia Airlines flight 17 and subsequent sanctions against Russia, and European debt woes.

Yet despite this (non-exhaustive) list of high-profile and highly unpredictable events, the MSCI AC World index returned 224% (or an average 12.47% per annum) over the 10-year period1. So, while each event was a shock at the time – and in some cases with devastating human consequences – the impact on financial markets proved to be short-lived.

Looking beyond these events, there are larger forces driving society’s unrelenting progress over time – improvements in health, productivity, and technology, for example. These gradual advances tend to be less newsworthy, but are invariably more important to long-term economic growth and wealth creation. We believe that by focusing on these, rather than being distracted by short-term noise, investors are better placed to achieve the long-term returns they require.

Revisit your long-term goals

Staying calm in volatile markets is often easier said than done, not least because our emotional response to stressful events can influence our decision-making, and distort our perception of risk. Investors can overreact to major events, as a fear of loss causes them to prioritise recent data, and adopt a shorter-term mind-set, which may be at odds with their long-term investment horizon and goals.

So before taking any action, it’s important to take a step back and revisit the reasons why you originally invested. Consider your long-term objectives – do current events change anything, and is making changes to your investments likely to increase your chances of achieving them? Selling up to avoid any further losses may provide some short-term emotional comfort, but switching to cash is unlikely to deliver meaningful growth, especially in the current environment where interest rates are well below inflation.

If you are thinking of selling and reinvesting at a later date, remember that the low point of any sell-off only becomes clear with hindsight, and timing the market is notoriously difficult. If markets were to rebound quickly, as often happens, then you could end up re-entering at a higher level than you sold. History shows us that it’s time in the market that tends to yield the best long-term results.

Positioning for market volatility

If you’re prepared to stay the course, there are ways to help reduce the financial (and emotional) impact of market downturns.

A diversified portfolio that combines assets with different risk/return attributes can help reduce risk and smooth returns over time. Equities tend to offer the best returns over the long term, but are also more volatile in the short run. Cash, gold and government bonds, often referred to ‘safe-haven’ assets, typically offer lower returns, but tend to fare better than stocks in shock events. Holding a mix of assets that respond differently to market events can provide a buffer against short-term weakness. Investment professionals can help you build a portfolio with a level of risk that’s right for your circumstances and goals.

Consider opportunities as well as risks

In times of discomfort, it’s worth asking yourself this question before taking any action with your investments: Are you considering all the possible scenarios, and their probabilities, not just the worst case?

Remember that weaker markets can provide opportunities to top up exposure to great companies at better prices. Losing sight of that investor reality is easily done when life’s events take an unexpected, and perhaps unpleasant turn. As an investor, it’s imperative to view your assets with a long-term perspective, however counterintuitive that may feel at the time.

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