Volatile markets can cause much investor anxiety, yet it could be a great opportunity for making attractive long-term investment returns. Check out our lessons learnt on market volatility and best investing tips to position your investment portfolio to ride through any market condition. (5:58 min read)
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Volatile markets tend to induce investor anxiety but also create additional opportunities to seek long-term investment returns.
Sounds contradictory, we know.
To show you how volatility can be more of an opportunity than an inconvenience, we are going to:
- take a look at the current state of the market,
- share our biggest lessons learned as investors during market volatility and;
- outline some top tips for positioning your investment portfolio to thrive under any market conditions.
As you may have heard, read or experienced, most stock markets around the world fell sharply over the last quarter of 2018.
Investors have had a lot to worry about including: slowing global growth, the U.S.-China trade war, how aggressively the U.S. Federal Reserve might raise interest rates, U.S. Government shut down and uncertainties around Brexit in Europe.
But let’s put this all into context.
The recent market weakness came after a stellar run in 2017. During 2018, we saw volatility creep back into the markets as strong returns peaked in September before falling sharply at the end of the year.
2019 Market Outlook – are we in for another bumpy ride?
So far in 2019, global stock markets have started to bounce back as investors realised things were not as bad as they thought.
As Kevin Hua, AtlasTrend Co-founder and Head of Investments would put it:
“Growth doesn’t always happen sequentially or is evenly timed to quarterly results – the market tends to overreact to news whether it’s good or bad.”
What can we expect for the rest of 2019?
You could analyse Google Trends for all search terms relating to business and politics to predict whether a stock market crash is approaching like these university researchers did, but we take a different approach.
For the remainder of 2019, we believe some measure of volatility is likely to continue in financial markets as the macroeconomic headwinds (such as the U.S. and China trade war and pace of U.S. interest rate rises) facing investors are managed.
We’ll be keeping a particularly close eye on developments in the U.S. market.
Why? While the U.S. economy now represents slightly more than 20% of the world’s economy, the U.S. equity market still makes up around 54% of the global equity markets (MSCI ACWI Index).
We’re encouraged by the most recent positive developments. For instance, on the U.S-China trade war, agreement was reached to pause tariff increases until 1 March this year.
We share the view of some market strategists that 2019 could be a good year for stock markets if the key macroeconomic issues are resolved.
Overall, we believe market conditions will remain largely conducive for further equity market appreciation over the next twelve months. However, investors will need to be more selective in their stock and portfolio positioning.
So, how do you position your investment portfolio in times of market volatility? Check out our team’s top 4 tips to help you make your money work for you.
1. Don’t be afraid of market volatility
Markets move in cycles. This is a fact.
Whether you’re investing in stocks, property or even crypto assets, you’ll know prices fluctuate.
Market volatility can bring about opportunities. It’s better to embrace it than be afraid of it.
“Volatility does not determine the risk of investing…If you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk.” – Warren Buffett
Let’s take a historic look back at the S&P 500 Index, which measures the performance of the largest 500 U.S. listed stocks.
What can we learn from the ups and downs?
- Market corrections – typically defined as more than a 10% decline from a recent high – whilst unsettling for investors, are fairly common. Over the last 50 years, there has been 21 market corrections and 6 bear markets (declines of 20% or more).
- There’s usually a sharp upswing after a dip, showing that markets can recover quickly after corrections.
- Looking at a short window, the peaks and troughs in the chart can appear quite sharp but over a long-term period the slope is more gradual, and trends upwards. The cumulative returns were 220% over the last 10 years and 807% over the last 30 years (to 25 January 2019).
And if you’re keen to learn more on market volatility, here’s a useful, visual guide that won’t put you to sleep.
Now let’s look at how these observations can help with guiding your investments.
2. Invest for the long term
Given markets go up and down, the obvious strategy is to invest low and sell high.
However, if you’ve tried this approach, you’ll know trying to time the markets can be futile.
Unless your crystal ball can reliably predict the future, selling out after a brief period of decline rather than focusing on your long-term goal can cause you to miss out on significant returns when markets rally.
Looking at the above chart as an example, the last major market correction was during the 2008 global financial crisis – the S&P 500 Index dropped by 38% during this year.
Investors who panicked and sold out – moving all their investments into cash – would have locked in their losses and missed out on the subsequent 186% returns since the beginning of 2009 as markets rebounded.
“You’re always going to get speed humps along the way in any long-term growth story” – Kevin Hua, AtlasTrend Co-founder
3. Start early and invest regularly
A good way to take emotional biases and investment risk out of timing the markets is to get into the habit of investing regularly, building up your investments over time.
You can set up an automated investment plan to invest a fixed amount each month where you let your money work in the background. This technique of investing a fixed amount at regular intervals is often referred to as Dollar-Cost Averaging.
This is how Dollar-Cost Averaging works:
If you invest in a fund, the unit price of the fund is calculated daily based on the share price movements of the underlying stocks the fund invests in. If you invested $300 on the 15th of each month, you will be buying into the fund at the unit price on the 15th of each month. So over time, the overall buy-in price of your investment will be the average of the unit prices on the 15th of each month. As markets dip, it effectively helps to reduce your average buy-in price.
When you start early, invest regularly and have a long-term mindset, there’s potential for a magnified result with the powers of compounding coming into play.
Compounding is simple but powerful mathematics and a frequently cited investing concept whereby any returns you make on your investments are reinvested, so you can earn returns on the returns and help scale your investments significantly over time.
Let’s circle back to the previous example where you invest $300 every month.
If you started this when you turn 25 and manage to achieve an 8% return each year, you’ll have over $1 million before you turn 65 years old.
4. Stick to fundamentals, not emotions
As a young analyst, I experienced daily emotional highs and lows depending on what happened in the markets and how the portfolio moved.
For everyday investors, it can be just as tempting to check how your investments are doing on a daily basis – almost like an addiction.
Staying on top of your investments and knowing exactly where your money is going is a good thing, but don’t fall into the danger of letting your emotions guide your decision making.
The key is to try to understand what’s driving the price movements and stick to your investment goal.
Over the years I’ve learnt to filter out the noise and not follow the herd.
Dig into the fundamentals of what you’re investing in, and only then assess how the news affects the long-term prospects of your investment.
Keep calm and try to enjoy the (sometimes bumpy) ride; it can be a rewarding journey for those who are willing to stay the course.
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