investors ignore volatility - graph of falling share market valuation against background of Greek pantheon

Investors, ignore volatility and don’t join the panic! Investors ignore volatility, particularly short-term volatility, because they invest strategically – 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.

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 that has been given by commentators and analysts over the early hours of this morning as to what drove the trade this way; and to encourage investors (those with long-term plans and goals) to hold to their strategies and to 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 (and 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.)

(It should also be noted that most commentators were confirming that investment fundamentals regarding the USA economy, suggested that this drop in market values will be short-lived given the exceptional results being reported by companies in the US, whether they derived their income completely within the US – or like the majority of the companies on the main index, the S&P500 – derive 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 – as well as 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.

  • A view on the outlook for the economy generally;
  • The psychology of the market participants;
  • Liquidity (including availability of credit); and
  • Speculation.

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 that has been designed around their current asset/ financial position; their expressed long-term goals; their reviewed and confirmed investor risk profile; their investment time-frame; and any investment products determined as appropriate to meet the strategic aims of the advice we deliver.

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, particularly 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!

Anticipating reaction to what might be a short-term activity (that has now materialised) I recently sought out the author of the oft-quoted:

“There is nothing to fear, save fear itself”

…and am advised that it was Franklin D Roosevelt, former President of the United States. It is worth reflecting on that quotation in this circumstance.

Now is not the time to panic: and neither is it yet the time for bold action (such as 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, in this market we are taking a wait and see stance. Before seeking to resume the gradual buy-in through dollar-cost-averaging(5) we will want to see the market show a clear bottom and some indication of the resumption of growth – which we still favour as the likely trended direction for the next eighteen months (not at all excluding 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 activity.

Now is the time to read through the strategy that you set and agreed should be adopted with your financial planner – and take comfort in 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 – and 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 and 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 in to 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 as to avoid, in most circumstances, having to sell down equities and other securities other than at a time of your choosing (thus being able to avoid market situations such as we have today).

We trust that you remain confident that 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 to deliver clients assurance about their future financial independence and well-being. We assure you that we are available to deal with your concerns and will respond at our earliest mutual convenience.

If you have concerns that your circumstances may be different from what was last conveyed to your financial planner, please either phone our office (on 07 34213456) or complete the website Contact Us form to arrange a meeting to review those circumstances at the earliest mutually-convenient opportunity.

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

First published in August 2011, this post has occasionally been refreshed/ updated, most recently in April, 2021.