Volatility in the markets is normal, but many investors can’t cope with it. 10 tips from one of the world’s largest asset managers How will investors remember 2020 can help? If they were not to use the word “pandemic” or “coronavirus”, they would probably put “volatility” high on the list. The March slump, then spectacular increases, interrupted by solid corrections in September and October. For someone who invests in the capital markets without a specific plan, it was difficult to withstand this rollercoaster.
Boring investing?
“Good investing is boring,” says George Soros, a legendary investor. The point is that if we build a universal and tailored investment strategy, we will not be overly excited about what is happening on the markets, and we will calmly stand aside and wait for opportunities. Fidelity International lists 10 universal tips that can help you achieve this kind of “investment zen”:
- Volatility is a normal part of long-term investing
- In the long term, taking the risk associated with stocks is usually rewarded
- Market corrections can create attractive opportunities
- Avoid pausing and starting investments
- The benefits of regular investing usually increase over time
- Diversification of investments helps in smoothing out results
- Invest in high-quality dividend-paying stocks to earn regular income
- Reinvest income to increase total returns
- Don’t be fooled by the general mood
- Active management can be a very effective strategy
Volatility is a normal part of long-term investing
This is the starting point. Accepting the fact that markets sometimes overreact to what is happening in the economy will help us to move more calmly and rationally through periods of market “blizzards”. With such a base, we can focus on long-term investment goals and start thinking about taking advantage of opportunities when the markets are cheap.
If you are a long-term investor, sooner or later you will experience a deep correction. Instead of panicking, approach the situation like an in-store sale. History shows that periods of market panic were a great time to increase exposure to the stock markets, because their prices became more attractive.
In the long term, share prices are determined by company earnings, not investor sentiment. If our portfolio is sufficiently diversified (there are many good global companies in it), we can expect that it will bring a higher return over e.g. 10 years than an investment in bonds – especially in real terms, i.e. after taking inflation into account.
Avoid pausing and starting investments
The table below illustrates well why traders should not try to enter and exit the market when trying to predict periods of “highs” and “lows”. The history of the last 28 years (1992-2020) shows that the total return of the S&P 500 index is around 1240%, but if we missed only five days with the highest daily gains of this index, then our profit would decrease to 789%. All of these best five days were during periods of the greatest market panic – in October 2008 and March 2020.
The benefits of regular investing usually increase over time
Whether you invest for retirement or for your child’s studies, it is reasonable to take a regular approach – pay a certain amount of money every month or quarter, regardless of the market situation. In the world of investment, this approach is called purchase price averaging. This does not guarantee an above-average profit, but it allows you to reduce the average cost of purchase, e.g. of investment fund units. And while it may seem illogical to invest in times of panic selling in the markets in terms of limiting losses, buying assets at low prices can help maximize the benefits for the investor when the rebound eventually occurs.
Diversification of investments helps in smoothing out results
Active asset allocation, i.e. moving money from one place (e.g. shares) to another (e.g. bonds) depending on the assessment of market prospects, is a breakneck task, even for professional managers, and in particular for small individual investors. Therefore, it is worth dispersing the risk associated with a specific asset class to different places or investing in a diversified package of investment funds.
Many stable, large companies pay dividends on a regular basis, even in times of market volatility. Such companies often operate globally and are able to cope with periods of declining economic activity. Investing in such companies can reduce the fluctuations of our investment portfolio.