Investors ignore volatility

Investors, ignore volatility!

Stand aside from the panic!

Successful, seasoned investors ignore volatility, particularly short-term volatility, because –

• they invest strategically, and
• for the long haul.

We brought this article to clients on the morning after an overnight Wall Street correction; and before our markets opened on that August morning in 2011.

Client alert

The US stockmarkets fell by around 5% overnight. The Australian All Ords is likely to start the day about 3% down. The following notes will try to convey some of the reasoning given by commentators and analysts over the early hours of this morning. They will explain what drove the trade this way. Additionally, they will encourage investors (those with long-term plans and goals) to hold to their strategies. Investors should not be influenced by the irrational actions of high volume and other market traders.

Firstly, a reminder that investors are in the markets for the long haul: typically, we would assume in excess of a five-year plan for equities. If you are investing towards retirement, your investment timeframe should be seen as the number of years that will take you through to your life expectancy. To put some numbers to that, if life expectancy is, say, 80 years of age; and you are currently 60 years old – then your investment horizon is 20 years. We will come back to talk about investors whose investment horizon is shortened by virtue of the above factors.

Contributors to the volatility

It should also be noted that most commentators were confirming that investment fundamentals regarding the USA economy suggested this drop in market values will be short-lived. This is because of the exceptional results being reported by companies in the US, whether they derived their income completely within the US. Moreover, like the majority of the companies on the main index, the S&P500 derives between 30% and 60% of their revenue from global, significantly emerging, markets.

The market moves overnight and expected today have been said to have arisen from a number of factors that are listed below. Depending on which commentator was speaking, they have had different views on the relative influence of each factor. Additionally, they had a different ‘pick-list’ of factors by way of ‘explanation’. The factors being discussed included –

• The political indecision and inadequacy of the ‘debt ceiling resolution’ in the US of A has increased a sense of uncertainty;
• The incompetence of the Euro zone in dealing with the sovereign debt crises in the PIIGS economies;
• The emerging global concern about stalling of the recovery (as being reflected by Central banks easing their rhetoric around interest rates – and some that were expected to tighten, have held rates steady in anticipation that their economies have slowed);
• The irrational actions of speculators; and
• The high volume, algorithm-driven computer traders.

Reactions to temper responses

Regular readers of articles (1) published by Continuum Financial Planners will be aware that we hold a number of consistent views about engagement in the financial markets. Our clients only receive investment advice from us – we do not advise on trading activity. This means that all of our active clients (2) are working to a strategy. This strategy has been designed around their current asset/financial position. It also considers their expressed long-term goals and their reviewed investor risk profile. Additionally, the strategy includes their investment time-frame and any products deemed appropriate to meet the strategic aims of the advice we deliver.

The current position is that fear(4) has taken hold of the market participants. It particularly affects the traders and high volume computer traders. Computers don’t have the capacity to have fear as such. However, they do apply mathematical calculations to market activity and chase that. If the activity is driven by fear, the computers compound the effect. The shares traded on the New York Stock Market overnight was the heaviest volume for more than a year. At close of trade, there had been 100 Sell orders for each 1 Buy order. Almost the entire volume on trade today was by the traders. There was negligible selling activity by the Institutions and Mutual Funds!

Articles we have published that may help calm investor concern

As has been expressed in many quarters, including several articles (still available on our website) the performance of the various financial markets(3) reflects some of the following attributes –

The current position is that fear(4) has taken hold of the market participants. It particularly affects the traders and high volume computer traders. Computers don’t have the capacity to have fear as such – but what they do is apply mathematical calculations to market activity and chase that. If the activity is driven by fear, the computers compound the effect. The shares traded on the New York Stock Market overnight was the heaviest volume for more than a year. At close of trade there had been 100 Sell orders for each 1 Buy order. Almost the entire volume on trade today was by the traders – there was negligible selling activity by the Institutions and Mutual Funds!

How strategy eases the mind

As mentioned earlier, some of our readers will have a shorter time-frame. They may be alarmed that there won’t be adequate time for recovery. Again, be assured that your portfolio has most likely been adjusted over time. This ensures that any short-term cash requirements are already built into the portfolio you are working to. Self-funded pension-based clients of Continuum Financial Planners will be aware that their strategy provides for sufficient cash to be held. This prevents, in most circumstances, having to sell down equities and other securities other than at a time of your choosing. Thus, you will be able to avoid market situations such as we have today.

We trust that you remain confident. We are working to ensure the strategies and longer-term goals and aspirations of clients – both from accumulation and protection aspects – are well in hand. This work aims to deliver clients assurance about their future financial independence and well-being. We assure you that we are available to deal with your concerns. We will respond at our earliest mutual convenience.

Take some deep breaths

Now is not the time to panic: and neither is it yet the time for bold action. This includes not buying in just yet.

In times past, readers will be aware that we may have been using words such as ‘buying opportunity’ in these circumstances. For now, we are taking a wait and see stance in this market. Before seeking to resume the gradual buy-in through dollar-cost-averaging(5), we will want to see the market show a clear bottom. Moreover, we want some indication of the resumption of growth. We still favour this as the likely trended direction for the next eighteen months. However, this does not exclude the possibility that the journey will be ‘volatile’.

In simple words, we repeat that now is NOT the time for investors to panic with a sell order.

…and review your strategy

Now is the time to read through the strategy that you set, agreed should be adopted with your financial planner. Take comfort in the fact that you consistently act in accordance with that strategy. For active clients(6) this will always be updated and/or confirmed at the annual review of their financial plan and current position. For others, a hold steady approach will ensure that the units of investment held are not diminished in this circumstance. As the dollar value of those units recovers in the months ahead, the value of the decision not to sell into this market circumstance will be appreciated.

As mentioned earlier, some of our readers will have a shorter time-frame. They may be alarmed that there won’t be adequate time for recovery. Again, be assured that your portfolio has most likely been adjusted over time to ensure that any short-term cash requirements are already built into the portfolio you are working to. Self-funded pension-based clients of Continuum Financial Planners will be aware that their strategy provides for sufficient cash to be held. This prevents, in most circumstances, having to sell down equities and other securities other than at a time of your choosing. Thus, you will be able to avoid market situations such as we have today.

Strategy review

We trust that you remain confident. We are working to ensure the strategies and longer-term goals and aspirations of clients – both from accumulation and protection aspects – are well in hand. This work aims to deliver clients assurance about their future financial independence and well-being. We assure you that we are available to deal with your concerns. We will respond at our earliest mutual convenience.

Our clients who subscribe to one of our ongoing service packages have their circumstances reviewed annually.  They minimise exposure to the effects of volatility.   To make an appointment to have your portfolio reviewed to minimise the shocks of volatility, either –

• phone our office on 07 34213456, or
• at your convcenience, use the linked Book A Meeting facility.

References:

1. Continuum Article Library
2. Client Value Proposition
3. Market performance up to expectations
4. Panic and fear
5. Dollar cost averaging
6. Fee for service policy

( We originally posted this article in August 2011.  We occasionally refresh/update it, most recently in June, 2025.)