BY: FAZAAD BACCHUS
2018 has seen a word that has been hiding for some time. The word is volatility. It is everyone’s nightmare when volatility steps in. For almost all of last year,there was little volatility and most investors were quite happy any time they looked at their investments. However,the dreaded word has been very much at play for the last five months.
What causes volatility? Over the last five months,there were a few things that have caused significant volatility. The trade war with China, the steel tariffs, the threatof war with North Korea all add to the daily stress that the market goes through. Any negative news where there is speculation on commodities also put added stress, like the price of oil. Every bit of news causes the market to react.
The thing to understand is that as long as you are in the market, meaning you have money invested you will be subjected to volatility. There is nothing you can do but expect it. However, when the markets are functioning like a roller coaster what do you do? Inexperienced investors make the mistake of trying to cut their losses. This means when the market is down, they sell off at a loss. The smart investor, on the other hand, waits for the market to go down and then buys more. The idea behind that strategy is to buy low and hold.
My personal opinion is that investing is and should be for the long term. At least you should plan to stay three years in the market. I remember in my early years, one good thing that I learned was “buy a good company and hold it”. This is the same principle when investing in mutual funds. You buy some good funds and you hold them. During the period that you own these funds, the market will go up and come down, but in the long run,these funds will even themselves out to bring you a positive return.
Asset allocation is a great determinant of how well your portfolio will perform, but only so in the long run. Depending on your age, how close you are to retirement or needing your money you may find that you should invest in less risky and better-paying funds or more conservative investments. When you are younger you may choose to have an all-equity portfolio but as you,near retirement,you should have more of a balanced or less of an equity portfolio. At this stage of your life, it might be better to preserve your money than chase after returns.
To be able to deal with volatility, your portfolio ought to have more bonds than equity. Equity market can be very volatile which causes investors to make mistakes when markets go down. An investor should understand that their funds could be 10% or 15 % less thanit was a year ago. Can you handle such a drop in the value of your investments? If not, you have to remain in the conservative portfolio so that volatility does not affect you, causing you sleepless nights. Talk to your advisor when you get your mid-year statements and ask about some balanced funds which have a medium-low risk, definitely, this could help you sleep better at night.