“The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.” Warren Buffet
The last few weeks have seen the return of something that Investors haven’t encountered for quite some time, Volatility. Volatility is essentially the amount of price change an Investment experiences over a given period of time. If prices stay relatively stable, the security has low volatility. A highly volatile investment is one where the price moves erratically. After months, in fact years of low volatility upward trending markets we now have a return to more erratic price swings. This recent activity should not come as a shock to experienced Investor, after all we’re approaching the 9th birthday of the longest Bull Run in history, and it was inevitable that we’d see a correction at some point. At a time like this it is worth revisiting some of the content of our previous articles regarding issues of market volatility and how Investors should behave.
Don’t panic: Try to remove the emotion from your Investment decisions, if you are a long term investor, your circumstances haven’t changed and you are invested in a well-diversified portfolio which matches your risk profile then there is no need for you to do anything. Many investors who panicked and dumped stock in 2008 and 2009, believing they could get back in when “the dust had settled,” likely suffered equity losses without the benefit of fully participating in the recovery. Also, try not to look at your accounts every day. It’s unnecessary and may do more harm than good. A good financial advisor should ensure that you have undertaken a ‘risk profile’ and established how much risk you are comfortable with. This means that in the event of a correction like we’re currently experiencing there should be no need to panic or re-balance your investment if you are in an appropriate Investment to start with.
Diversification: Diversification is one of the cornerstones of successful long term investing, at times like this diversification is more important than ever, because when markets are volatile, you never know what asset will go up in value and what asset will go down in value, however over the long-term, a well-diversified portfolio should increase in value and provide you with the returns commensurate with your chosen risk portfolio.
When investing, there are a number of different asset classes that you can consider, such as property, cash, commodities, equities and bonds etc. By diversifying and investing in more than one asset, your portfolio’s overall investment returns should have a smoother, more consistent journey. Many of these asset classes are inversely correlated meaning they will automatically ‘hedge’ your risk. If one asset is performing poorly, the hope is that you can offset these losses with better investment returns in another asset category.
Euro cost averaging: Some Investors with a higher appetite for risk often see volatility or a period of correction as a buying opportunity and try to make the volatility work in their favour. Rather than thinking of it as a 10% fall, think of it as a 10% reduction in the price of stocks so you can buy more. During periods of uncertainty and market volatility many investors are inclined to wait until things ‘settle down’ before committing. Some investors try to predict the bottom of the market, others wait until confidence has returned before Investing. Ironically, even when markets do recover and confidence does return, these very same investors sometimes wait for the market to fall again in order to pick up some ‘bargains’. You can never fully eliminate this risk but you can certainly reduce the risk of buying at the wrong time by adopting an approach such as Euro cost averaging. Quite Simply, Euro cost averaging is a strategy which involves contributing regularly into a particular investment at regular intervals over a period of time, more shares are purchased when prices are low, and fewer shares are purchased when prices are high. The cost per share over time eventually averages out. This reduces the risk of investing a large amount in a single investment at the wrong time.
In summary, long term Investors should not panic, they should be patient & remain Invested, One of the main reasons why many Investors are rewarded over the longer term is that they tolerate this type of volatility and remain invested.
Barry Kerr BBS QFA CFP® is MD of Wealthwise Financial Planning, Block C, Hartley Business Park, Carrick on Shannon, www.wealthwise.ie. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.
