Important Lessons During Volatile Markets
More money has been lost trying to anticipate and protect from corrections than actually in them.
When markets go up, many investors always claim that they can stomach volatility. After all, volatility that pushes the prices of assets upwards is always welcomed. Only when we experience downward volatility, our true investment stomach is revealed!
As investors, we should always expect uncertainty. Volatile periods like the one we’re experiencing now can be intense, but investors who learn to embrace it, go about their lives as normal and don’t meddle with their portfolio will often triumph in the long run. Reacting to down markets is a good way to derail progress made toward reaching your financial goals.
Big Bad “R” Word
Are we headed into a recession? This diagram by Dimensional Fund Advisors illustrates that a century of economic cycles teaches us we may well be in one before economists make that call.
But one of the best predictors of the economy is the stock market itself. Markets tend to fall in advance of recessions and start climbing earlier than the economy does. As the chart below shows, returns have often been positive while in a recession. So like Peter Lynch’s quote above, when is the right time to prepare for the recession? It is very hard to tell and the cons far outweigh the benefits of trying to position for such an event.
The chart below plots stock returns versus whether the economy was in a recession or not. You will notice that even when there was a recession, there are years with positive stock market returns. It’s a great illustration of the forward-looking nature of markets. If you’re worried, other investors are too, and that uncertainty is reflected in stock prices.
Waiting For a Better Time
After the market has declined, it is very natural to feel that you should sell to stem further losses. You may think, “I’ll sit out until things get a bit better.” But by the time markets are less volatile, you’ll have often missed part of the recovery. Yes, it stings to watch your portfolio shrink, but imagine how you’ll feel when it’s stuck while the market rebounds.
Big return days are hard to predict and you really don’t want to miss them as the video below shows.
The example uses the US market (S&P 500) as an example. If you invested $1,000 continuously from the beginning of 1990 through the end of 2020, you would have $20,451. If you missed the single best day, you’d only have $18,329—and only $12,917 if you missed the best five days.
History shows that if you hold a broadly diversified stock market, it tends to rebound quickly. The same can’t be said for individual stocks or even entire sectors (think Enron, Kodak or in a local context Hyflux or Noble Group). So, while investing means taking on some risk for an expected reward, investors should mitigate risks where they can. Diversification is a top risk mitigation tool, along with investing in fixed income and having a financial plan.
An Advisor Can Help You With a Second Opinion on Your Investments
We saw many fads crop up through the pandemic, from baking to making dalgona coffee. In terms of investing, pandemic investment fads like FAANGs, meme stocks and NFTs stole the limelight. This year, these “trendy” investments have fallen far out of favour. The chart below shows stocks which were the darlings of the pandemic, and the losses as of the end of Apr 2022.
In addition, many cryptocurrency speculators have been feeling the pain of the collapse so far this year.
Do you know the names of all the stocks you own? Then you probably own too few. How much of your portfolio sits outside Singapore? Because about 99% of the global market is comprised of companies listed outside of Singapore. If you stick to the familiar local names, then you are missing an incredible investment opportunity set.
If you want to outperform the market, allow decades of academic research to light the way. Portfolios focused on small caps, value stocks, and more profitable companies have had higher returns over the long run. The portfolios we use are invested across more than 10,000 global equities in over 40 countries.
Beyond a well-designed portfolio, one of the best ways to deal with volatile markets and disappointing returns is to have planned for them. The path to your financial goals and dreams is never a straight line. An advisor can help you develop a plan that caters for the possibilities that you’ll experience some market lows. They can help you find the confidence to weather the current storm and get to the other side, and also offer a valuable second opinion to ensure everything is running smoothly.
A sound approach to investing—through a plan, a well-designed portfolio, and an advisor—is the ultimate self-care during these rough markets. Your future self will thank you.
