Volatility: Give it Time

Though it may sound like something to be wary of, volatility is and always has been part and parcel of investment.

When we say ‘volatility’, it’s usually referencing the amount of risk or uncertainty associated with a security’s value. If you’re looking at the volatility of certain assets, you’re looking at how largely the prices swing up or down around the mean price.

Evidence shows us that the longer you’re looking to invest, the more ups and downs you can weather as the market will always return to the mean. If you’re looking to invest short term, volatility is probably not your friend – which is why we always say you should start as soon as you can, to give yourself that cushion of time.

The market goes up or goes down, crashes or corrects – and generally gets on with it, given enough time. Recently we’ve seen examples of this with the various COVID-related scares. Following the initial pandemic pandemonium, the market has (for the most part) become less reactive and more rational. The market cares less about COVID than we might assume, even if it has caused a few hiccups along the way.

Historically, there have been many different events where markets have fallen. From the stock market crash of 1929 or Black Monday in 1987, to the 2001 dotcom bubble pop or the global financial crisis of 2008. One thing remains constant: The market always recovers.

In terms of recent volatility, global markets are down 10% since the beginning of the year. No particular event has driven the fall, and company balance sheets are healthy.  The drivers appear to be geopolitical tensions thanks to Russia and concerns rising inflation and borrowing costs may impact some heavily indebted households.

In New Zealand, we’re seeing headlines like “NZ sharemarket wobbles as Omicron emerges” (RNZ). In late January the NZX-50 index was down more than 220 points, making it the biggest single session decline since January 2021.

While that may sound grim, we can look at that as part of a more general historic trend. Every year from 1951 - 2020, the market has averaged:

  • ~5% or more decline about three times per year

  • ~10% or more decline about once per year

  • ~15% or more decline about once every three years

  • ~20% or more decline about once every six years

 

Beware the flavour of the month

Precious metals are no longer the shiny kind you gift to your significant other – the world’s moved on to other materials.

Uranium was the ‘it’ stock last year, given the product was in hot demand for nuclear energy. By September it had surged to a five year high – and an ongoing energy crisis in Europe could mean nuclear energy, and therefore uranium, is even more popular in future.

Lithium is in an ‘up crash’; movements towards clean energy has created an uptick in EV demand, which means more lithium-ion batteries. Of course, there won’t be an exception – given time, this too will return to the mean. We can see even as recently as December 2021 that these stocks took a tumble despite record high lithium prices driven by EV demand.

There’s also hiccups emerging in the lithium supply chain, like Rio Tinto losing out on their exploration licence in Serbia. This was after heavy protests from local groups concerned about the environmental impact of the project.

News like this brings into question whether the Western world can actually create a supply chain for lithium, or if demand will keep driving prices up until it becomes the next tulip mania.

And of course, we can’t talk about speculation without mentioning Bitcoin and other crypto. In its relatively short existence, bitcoin has proved prone to extraordinary swings, sometimes gaining or losing more than 40% in price in a month or two. While the gain might hold appeal for speculators, the trend of drops suggest cryptocurrency is not as separate or lowly correlated from the traditional market as it was originally purported to be.

 

Stay the course

In terms of what volatility means to you as an investor, consider the following:

1.)    Think ‘time in the market’, not ‘timing the market’. This is an old adage for financial success and has been proven right many times.

2.)    Don’t act on emotion. Not only will it increase your stress level, but ultimately it won’t get you ahead. It may feel wrong to hold your nerve while the market changes. The only thing more distressing than watching the market tumble while you’re in it? Watching the market fly upwards when you’re not in it.

3.)    If in doubt, sit down and have a chat with a trusted, independent financial adviser. They can help you create a plan based on evidence, not speculation, so you can handle those highs and lows.

Portfolios should be built with a variety of asset classes to support long term goals and plans. They are rebalanced based on market targets or weighting changes. They should take into account various scenarios to ensure there is no need to panic and if someone is drawing down, spending is accounted for in the short term.

There will surely be more problems ahead – we haven’t seen a stable period in world history yet. How markets react to events is always tough to know. If we react to them, it creates a decision-making chain. It’s hard enough to be right once and it’s near impossible to be right twice.

 

  • Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions. 

  • The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz