Don’t Let Volatile Markets Scare You

The stock market will always fluctuate, but investors often focus too much on short-term volatility. They worry, switch their investments and ditch their long-term strategy – all to the detriment of their long-term investment strategy.

“This is a mistake. The focus should always be on the long-term objective if you want to stay afloat in a choppy market environment. Furthermore, because the past is known, and the future is uncertain, the present always feels more volatile,” says Rian Brand, a portfolio manager at Sygnia Asset Management. This is a key behavioural attribute that needs to be controlled by investors.

“As a multi manager, we continually speak to varying asset managers, and they almost always warn that current markets are overvalued, and that the time for caution and careful stock selection is now. Right now. Not last year, or last month, but right now.”

Brand says it is therefore very important to steer clear from an emotional reaction to perceived volatility. If an investor is clear on their return objective and tolerance for risk, a strategic asset allocation can be determined that is likely to achieve this objective over their time horizon. Knowing that there is a long-term strategy can help the investor overlook current market fluctuations.

He believes an investment’s volatility should not be a concern for an investor who has an investment horizon of more than ten years.

“People are fearful when markets pull back or news flow turns negative. They think they can protect their investments by reducing risk, but often do not revert back to the original strategy, thereby missing out on the upside. There is definitely a place for tactical asset allocation, but it is smaller than we think and must be done carefully otherwise it can destroy value,” he warns.

“Apart from the costs involved, frequent switching of funds is just not worth the long-term growth that gets lost. Over time the investors who adopted a long-term approach are apt to come out ahead of those who try to time the market.”

He says there will always be risks to take as there is little return without risk. The amount of risk each individual is able to take will depend on their personal circumstances and investment targets. Investors who target higher returns, should be prepared to accept the inherent risks.

Brand also believes investors should educate themselves and make their own decisions, and if they are not comfortable doing this they should get independent advice as a sanity-check. A good adviser will recommend a well-diversified strategy as the cornerstone of an investment portfolio.

“Over an extended period of time, wealth is not only created by how much we saved, but by how much the capital we saved grew. Ironically, trying to reduce risk in the short term increases the risk of not achieving our long-term goals. Maybe it is time we change the adage ‘saving for my old age’ to ‘investing for my old age’”.