Investing in times of fear and volatility
Warren Buffet – the American investor and business tycoon – famously said that “as an investor, widespread fear is your friend because it serves up bargain purchases” The Chicago Board Options Exchange Volatility Index, or the ‘VIX’ as it is better known, is a measure of the expected volatility of the US stock market. Often referred to as the market’s ‘fear gauge’, the VIX is used by investors to measure market risk, fear and stress, before they make investment decisions.
In general, VIX values of more than 30 demonstrate increased likelihood of market volatility due to periods of uncertainty and investment fear. When the VIX falls below 20, investors can usually expect a more stable and less stressful period of investing. As the graph below demonstrates, fear has been at heightened levels due to the Covid 19 Pandemic. Over recent days the far index has dropped again as markets have responded to huge levels of global economic stimulus and the level of control that has been exerted on the virus by the global lockdown.
As the VIX reached unthinkable highs, investors responded by selling down investments resulting in reduced valuations the likes of which have not been seen in over a decade. As Warren Buffet says this offers some bargain purchases.
Reviewing markets over the years we would all agree that volatility and fear are given components. By remembering some key points investors can avoid basic mistakes and even benefit from these fear filled market conditions.
Volatility is normal
There is always plenty to unnerve markets and cause volatility. Taking a look back over the last few years we have had; Euro Zone debt crisis, North America and Chinese trade wards, Brexit, North Korea and Iran crisis to name a few. These situations are invariably unnerving, but they are all ‘normal’ economic and political events. As an investor having the ability to accept this normality and resist emotional knee-jerk reactions will keep you on track with your investment and financial planning objectives.
Long-term investors can be rewarded for taking risk
There is a well known relationship between risk and reward. Whilst investing in shares involves taking more risk than holding cash, over the longer term investing in shares will usually reward an investor with higher returns. Investing over a longer term can help smooth out this short-term volatility and increase the likelihood of an investment out performing cash.
It is time in the market not timing the market
Remaining invested is the key, especially during times when fear grips the market. When markets are volatile trying to time an exit and re-entry into the market is best avoided. The logic behind this is that when you are out of the market, you run the risk of missing out on the inevitably market recovery or rally. Time in the market, not timing the market generally pays off in the long run.
A diversified portfolio
As the old saying goes it can often make sense to avoid keeping all your eggs in one basket. A well constructed portfolio can hold a blend of assets from shares and funds to bonds and commodities, alternatives and some cash. As well as diversification across the asset classes, geographical diversification and industrial sector diversification can ensure that your investment is offered some protection during a fearful market downturn.
Bottom of Form
Avoid emotional responses
Obviously, this is easy to say, and when the rest of the market is seemingly selling it is hard not to be caught up in the panic. Remembering your investment goals and objectives and investment time horizons is of vital importance will undoubtedly help you avoid making short term emotional decisions.
We are assisting a range of clients with their investment options during this time. If you need any support, guidance or just a few suggestions then please do not hesitate to contact us.
The value of investments and income from them may go down. You may not get back the original amount invested.