Private Client Wealth Management

Investment principles for volatile markets

In times of heighted market volatility and financial stress, it is important for investors to remain disciplined and not give way to rash decision. Investors should remain cognisant of key investment principles that have held true over many market cycles. Investors that remain disciplined and adhere to these principles will be rewarded in the long run.

What is driving current market volatility?

A combination of high global inflation, together with the recent banking failures in the US with the attendant concerns of a contagion effect are sending ripples through global markets and emerging markets in particular. South Africa falls into this basket, and we are experiencing the turbulence of headwinds that are blowing from the North. But as we have learnt from decades of experience and wealth management, it is imperative for investors to adhere to the following investment principles that have remained true over multiple market cycles:

Volatility is normal, maintain a long-term investment horizon.

Market volatility is a normal occurrence and increases in periods of uncertainty brought on by an environment of heightened macroeconomic risk. The best tool in reducing volatility is a long-term investment time horizon. Investors that adopt a long-term approach to investing have a better chance of reaching their investment goals than those who react to short-term market fluctuations. Furthermore, staying invested over the long term can help reduce volatility, as fluctuations in investment returns tends to smooth out over time. Moreover, market volatility is not all bad as it provides buying opportunities where quality assets can be acquired at attractive prices.  

It’s about time in the market, not timing the market.

Correctly timing the market is very difficult and doing so consistently is even more so. A strategy of jumping in and out of the market at the correct time relies more on guess work and luck than calculated and thorough investment analysis. As market volatility increases, investors may feel the natural tendency to want to move out of the market to avoid further losses. This move can, however, lock-in losses that could otherwise have recovered over time. It is, therefore, important for the investor to avoid trying to time the market.

Selling at the wrong time and missing just a few days of a market recovery can have a significant negative long-term impact on your portfolio. Looking at the FTSE/JSE Capped Shareholder Weighted Index (JSE Cap SWIX) over 10 years, if an investor stayed fully invested over the 10-year period, the annualised return would be 11.10%. Missing just 10 of the best trading days over the 10 years, investors would only experience a 6.16% annualised return. At the extreme end, missing 50 of the best trading days in the 10-year period, the annualised return would be – 4.7%.

Diversification

A golden rule in investing is to diversify. Diversifying your portfolio remains key to reducing volatility and risk, which can help smooth out returns over time. The key to diversification is to invest in assets that are uncorrelated or negatively correlated with one another. This can be achieved by investing across asset classes (cash, bonds, and equities) and within asset classes (industry sectors, geographic areas, and investment styles).  Moreover, not all financial markets move together. At any time, one asset class may be leading the markets and another asset class may be lagging the market. It is, therefore, crucial to have exposure to a mix of assets to ensure a more stable investment experience.

Hold your nerve

In the current volatile environment, it is very easy to lose your nerve and give way to rash decisions in reaction to adverse market events. It is crucial for investors to maintain calm in times like these and stick to their carefully thought-out investment strategy. Furthermore, it is important to note that the fundamentals of investing do not change in periods of financial stress but continue in both good and bad times.

Conclusion

At Warwick, we wish to reassure clients that we are fully focused on protecting your investments from permanent capital losses, by ensuring that you are invested in a diverse portfolio of quality assets that we expect to compound growth over the long-term. Furthermore, we believe that the composed and consistent investor will be rewarded in the long run for following the investment principles that have remained true over many market cycles.

One major benefit of private client wealth management is that you have a dedicated professional wealth specialist or financial advisor just one call away. So, if you have any concerns of any nature whatsoever, please simply call your wealth specialist, or contact us on our Toll-free number 0800 50 50 50, or email us on clientcare@warwickwealth.com