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Demystifying how to face down volatility
Equities have been volatile in recent weeks. While this is unsettling investors should always resist the urge to take drastic action when markets stumble.
When stock prices move up and down violently over a short period as they have done in October, it’s natural for investors to feel disorientated. After all, the pain of financial loss is felt more deeply than the satisfaction that comes with investment success.
But experience shows that, to invest effectively, we need to control our urge to take evasive action at the first sign of trouble.
“Investors should never forget that the secret to capital growth is compounding – the snowball effect of reinvesting your returns to generate future returns,” explains Shaniel Ramjee, senior investment manager, multi-asset strategies, at Pictet Asset Management. “To benefit from the compounding effect, it is essential that investors maintain a long-term perspective at all times. Making snap decisions in response to one piece of data carries significant risks.”
Indeed, it is when markets are volatile that investors should remind themselves of the principles of effective investing.
Stay diversified. It’s a rule that investors should follow at all times, but maintaining a diverse range of investments during periods of market volatility is not only advisable, it’s necessary. History tells us that diversified portfolios are better able to withstand the negative effects of volatile markets than concentrated ones.
Fig. 1 Because stocks and bonds behave in different ways, diversification makes sense
Yearly return, by asset class
Source: Pictet Asset Management; data covering period 31.12.2012 - 31.12.2017. All figures quoted in USD. Past performance is not indicative of future returns. Benchmarks used are the MSCI World, S&P 500, Citigroup WGBI All Mats, MSCI Emerging Markets and JPM GBI-EM Global Diversified.
Maintain a long term perspective. In addition to building a diversified portfolio, keeping a long-term perspective is essential when markets stumble. Experience shows that crises and volatility are temporary, and that stocks eventually recover.
Fig. 2 Severe market declines are rare
Number of months in past 15 years when market has fallen...
Source: Pictet Asset Management, 2003 – 2017. Figures quoted in USD. Past performance is not indicative of future returns. Benchmark used is the MSCI World.
Staying the course – rather than reacting to short-term shifts in market gauges - can reap rewards over the long run.
Investing regularly helps. Even the most seasoned investment professional finds it difficult, if not impossible, to accurately time the market. That’s why investing regularly in fixed amounts is a potentially better approach to take over the long run. Investors who do this find they buy more shares at lower prices and fewer shares at higher prices.
Bonds aren’t the only answer. When trying to protect a portfolio during times of market stress, many investors gravitate towards bonds, which are valued for their defensive attributes. But they are not the only option. Instead of making wholesale changes to portfolios, investor could consider retaining equities but via group of stocks that have proven to be resilient during periods of high market volatility, such as those represented in the MSCI Low Volatility Index. Other commonly used tools to diversify a portfolio include alternative investments such as property or gold.
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
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Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
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For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
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