How I learnt to stop worrying and love the volatility
A healthy investment philosophy underpinning your approach that looks beyond the volatility can be beneficial in the long run
[SINGAPORE] After years of clear narratives driving markets since the global financial crisis, ranging from risk-on/risk-off, to pandemic economy, to highly concentrated returns in tech names, and the current relentless focus on inflation and interest rates, we are now seeing uncertainty grow among market participants.
Most recently, this can be seen in the rapid whipsaw in market interest rate expectations for 2025. They went from as many as six US rate cuts around Q4 2024 to a much lower forecast in 2025 a few weeks later, which continues to shift. Such swings are catalysts for volatility which we, as investors, should expect to see and get accustomed to managing.
In a volatile and changing world, as we see today, staying calm is not easy. But a healthy investment philosophy underpinning your approach that looks beyond the volatility – as opposed to purely reacting to it – can be beneficial in the long run.
Three points underpin this thinking:
- An investment approach that emphasises time in the market as opposed to timing the market is a potential route to more reliable returns.
- A more objective and methodical approach to investing mitigates common behavioural biases which may create challenges to meeting investment objectives consistently.
- Freeing up time to focus on a smaller number of higher risk/return satellite investments, after delegating a stable core portfolio, can be a time and resource-efficient working methodology.
Time in the market vs timing the market
Many investors want to wait for the optimal entry point before investing, but without the benefit of hindsight there is no truly predictable “right time”. Strong market performance in the interim can make it difficult to get into the market, and investors may find themselves holding cash for a far longer and costlier period than they originally anticipated.
Higher cash interest rates available now (assuming funds are placed into interest-bearing deposits) may cushion the blow. But even with average intra-year declines of 14 per cent, US equities have had positive annual returns in 33 of the past 44 years and averaged 10 per cent in annualised returns, based on the S&P 500.
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Not investing avoids “bad” days in the market, but also avoids “good” days and forgoes the ability to compound returns over time. This is a tradeoff that can work against the investor in the long run.
Behavioural bias
For the individual investor, behavioural biases can impair decision making and act as a drag on returns. The stock market is an aggregation of individual decisions, and at the index level this can play out in markets where prices deviate significantly from fundamentals, such as sales and profits.
Markets can become overly optimistic or pessimistic and, like a pendulum, rapidly swing back and forth, catching investors out. This happens in aggregate. Therefore, the longstanding advice for overcoming these behavioural challenges typically centres on keeping a long-term perspective by focusing on measures which turn down some of the noise that often derails investors, such as headline-grabbing market and geopolitical news. Put simply, stay calm and carry on investing.
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The reality is that behind the headlines, companies continue to produce products and services that generate value for their shareholders and the economy, and these companies make up one’s investment portfolio. It is common to talk about “the market”, but it is important for investors to distinguish their own individual portfolio from the market.
Companies, economies and markets continue to grow, sometimes in the background, slowly and steadily building the wealth of investors who stay the course and harness the power of compounding.
History shows that those who look beyond the headlines and stay invested through the ups and downs of markets are well-compensated. For those who cannot do this objectively and consistently, a professional manager can add value.
Shifting focus
Those who can successfully delegate on core portfolios can free up capacity and headspace to explore opportunities which are otherwise less appreciated by the market and may offer different or higher risk/reward profiles. Being able to free up time to look into areas where the investor has a competitive advantage, or an asset class with different risk premia such as illiquidity, can further augment and differentiate the portfolio.
In the face of challenges, good investing habits and behaviours are ever more important. For a start, investors should bear in mind the following five items:
- Keep an eye on the holistic picture. Is your overall wealth allocation optimal? Are you putting capital to work most effectively, without holding excess cash?
- Regularly remind yourself of your goals. How does data or news, and your proposed actions in response to it, affect your ability to reach your goals?
- Separate the facts from the narrative. Not all headlines will affect markets or, more importantly, your portfolio.
- Stay composed and reap the rewards. History shows that investors who stay invested through periods of uncertainty and volatility are compensated in the long term. Their returns compound over time.
- See beyond the immediate for opportunities. Challenging periods offer opportunities, for those who can see them. Hedging against risks can help to manage the downside, while helping you stay the course.
The investing landscape is complex, and at times challenging. But for those who have the right foundation – focus on a quality, well-diversified portfolio, and follow the timeless investing principles which can help overcome the behavioural pitfalls of investing – meeting long-term investing targets need not be so complicated.
The writer is head of investments Asia, Barclays Private Bank
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