What to do during Market Volatility

What to do during Market Volatility

“The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.”

Warren Buffet

In Light of the recent Stock market Volatility caused by the Coronavirus I thought it might be a timely opportunity to look at the issue of Volatility and the most appropriate Investor behaviour. Many Financial Markets fell between 10% -12% during Feb on the back of fear caused by the spread of Coronavirus. This recent activity should not come as a shock to experienced Investor, after all we’ve seen several corrections of similar magnitude in recent years. 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.  See the attached image which shows the performance of the S&P 500 since March 2009, there have been numerous valid “reasons to sell” during this period yet those who resisted the fear and temptation to sell have been very well rewarded with return of 431% over the period.

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 February as a 10%-12% fall in value, think of it as a 10%-12% reduction in the price of stocks so you can buy in March 2020.  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.