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a blue-toned graphic showing city lights at night overprinted with a graph of market shareprice volatility and some block and whisker charts - implying market volatility influence

Market volatility influences investment activity

That market volatility influences market activity, is evidenced by market participant engagement during different cycles.  We know that that markets are driven by several factors, including: supply, demand, liquidity and price.  Understanding why market participants engage as they do, isn’t sufficient to guide and gauge our own market moves.  To benefit from that understanding we need to know the relevant investment philosophies in play – especially our own.

By definition, volatility is experienced when prices rise and fall by dramatic amounts in short periods of time.  The liquidity created by such market action provides opportunities for investors who are strategically managing their portfolio.  They will be ready to

  • sell shares that reach their target value, on the rise; and to
  • buy shares that fall to an acceptable buy price.

Market volatility and its influence is consistent over time.  Investment activity extremes can occur during periods of volatility.  As the GFC started to unwind, we posted an article from which the extract below is drawn*.  The article was posted in August 2011.  That month triggered considerable levels of anxiety amongst investors (including superannuation fund members/ account holders).  As mentioned, they were still being cautious, less than three years out from the depths of the GFC.

The reference below, to being ‘consistent with earlier communications’, is to an article that was posted in February that year.  That article, titled “Investment risk and volatility“  is also something of an evergreen (or at least cyclically relevant).

Market volatility influences and effects

*”We have started another week of market trading and anybody within earshot of a radio or TV or in sight of any print media will be aware that the value of the share markets has seriously declined over the past few days – and that volatility (and volume of trade) is high.

Most of our readers will have heard the explanations being given for the downwards movement in the share markets, but not all will be aware that the US Bond markets have risen during this time. That movement begs the question then: if the US downgrade is such a catastrophic event, why are people flocking to buy bonds from a downgraded government treasury?

Understand the cause

Consistent with earlier communications, we need to think about what is happening here – and the result is that this downturn is being driven more by negative sentiment than by economic fundamentals. Our take on the matter (after taking in some of the comments from visitors on Bloomberg TV and local economic and market analysts in Australia) is that the following has developed –

  • Initial fear has given way to panic which, then feeding on itself, gave way to deep panic;
  • Typical of these markets, the huge volumes of trade are being undertaken by traders and retail investors – the Institutional investors are taking a much more subdued approach;
  • Market fundamentals, based on earnings and earnings forecasts are in stark contrast with the valuation now reflected in the markets;
  • Forced selling through margin calls on portfolios with inappropriate (in the circumstances) levels of borrowing – or panic by geared investors recalling the experiences of the 2008 crisis of confidence fuels some of the selling;
  • Shares are in deep value territory now and will recover quite strongly once the panic selling stops.
Seek assurance

We stand with our clients and encourage calm in the current situation. For those with even a hint of some nerve (and some as yet unfulfilled investment strategy goals), be ready to take advantage of this situation as soon as the market settles. This settling could take several weeks – but it could also be over within days: the important considerations will be –

  • Re-enter the market after the dust settles;
  • Only invest monies that were in the original strategy; and
  • Invest in the knowledge that it will be with a long-term perspective.

As always, we welcome calls from clients with particular concerns – and reassure clients for whom such events are nerve-racking that we are sensitive to your feelings and will try to get timely advice to you to deal with those concerns.

We are here to help

The experienced advisers at ContinuumFP are here to help you capitalise on situations where market volatility influences your investment activity.  Your investment portfolio should benefit from such activity where –

  • your goals and objectives are clearly understood,
  • you are investing according to a defined strategy; and
  • you regularly review the progress of your portfolio towards financial goals and objectives set to a clear time frame.

To make an appointment with one of our team – and to experience the value of working with a professional financial planner who puts your best interests first and foremost, please

(Originally posted in August 2011, this article has been absorbed into a new post in October 2018: it has occasionally been refreshed and updated, most recently in August 2024.)