Dealing with market volatility

3 min read

This article was originally written by Pendal Group Limited and is shared with permission.

Key take outs:

  • A large number of Australians have only become investors since the GFC – or have only started to take a real interest in their super since the GFC
  • A fresh period of sustained volatility is, to many, foreign at best, worthy of panic at worst
  • There are ways to maintain perspective without getting caught up in the daily soap opera of investment markets.

There’s been a lot of talk about market volatility recently. Stronger short term market moves make for good headlines - especially on the down days. Pendal, one of BT’s key strategic partners, has been flagging the return of volatility for some time.

Vimal Gor, Pendal’s Head of Bonds, Income & Defensive Strategies, stated back in June “Over recent months we have been making the strong case that as a result of the normalisation of global monetary policy, global liquidity will recede and market volatility will rise.” We saw this take hold through the last quarter of 2018 as uncertainties around trade wars and rising interest rates have flowed through to falling share markets.

So when markets get choppy it’s understandable to feel a little uneasy – below are four smart ways to help maintain perspective.

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1. Go back to the contract

With volatility ‘back’ in the markets, it’s a good time to remember what you signed up for. A measure of expected returns comes with a related measure of risk – or volatility. Penny-wisdom will only get you so far, so taking a sensible amount of risk is required to get ahead.

To adjust to – or learn about – coping with volatility it’s worth recognising the difference between market noise and market signals. This takes context, experience and at times, discipline.

2. Try to create some distance

When it comes to investment markets, uncertainty is a constant and even over shorter periods, returns sometime fluctuate wildly. You only need to look at a live ASX screen of stock prices and you can see the real-time pop and fizz. But stepping sufficiently above the ‘noise’ can bring context.

To explain this in simple terms: imagine you are standing on a giant stepladder. At ground level, look down and you’ll see the ants a’marchin. A few steps up and the miniature is less visible. Twenty feet up it’s different again (no ants). And so on, and so on.

The concept of volatility is the same, except time - not distance - is the measure. You need to remind yourself of your time horizon for success and find the right ‘distance’.

3. Let diversification do its job

Having a portfolio which is suitably ‘all-season’ will help ride out periods of volatility. But being all-season means there will be periods, potentially long periods, where there will be perceived underperformance, particularly when share markets are rising. For example, it may feel like your portfolio is underperforming if the Australian share market rises by more than your portfolio. But when that same share market falls 5% and your portfolio’s value is relatively unchanged, that’s your exposure to defensive assets successfully preserving your wealth.

True underperformance comes when situations arise that surprise: Portfolio defence you expected doesn’t kick in when needed, or an unanticipated event hits a particular asset and takes a large bite from your total return. That’s why it’s important to structure your portfolio to anticipate good and bad times. Structuring a portfolio without protection and hoping wild times don’t come is asking for trouble.

And remember, other’s people’s money is not a benchmark. For punters and professionals alike, it’s human nature to promote winners and stay quiet on the losers. No-one is right all the time. Don’t let the dinner party-type (you know the guy) psyche you out.

4. Choose your attitude

A final input to help deal with volatility is attitude. You don’t go to the nursery on Saturday, plant a seedling and expect to see a tree in your yard the following weekend. You know growing a healthy mature plant takes time, takes some work and there will be periods of higher and lower growth. The same attitude applies to investing.

One big benefit of being a longer term investor with a robust plan is you can get on with life. You don’t need to interpret and decide on a fresh course of action with every market twist and turn. Seeking professional advice, having a diverse range of assets and employing experienced, active fund managers can take most of the worry out of your hands, and allow you to approach more volatile times with a greater sense of calm and surety.

Interested in investing?

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About Pendal: Pendal Group Limited (Pendal), known as BT Investment Management until May 2018, is ASX-listed (ASX:PDL) with $92.8 billion in funds under management as at 31 December 2018.

Pendal is a diversified global investment manager with offices in Sydney, London, New York, Boston and Singapore. Pendal offers over 50 investment strategies including equities, diversified, property, cash and fixed income products. At 31 December 2018 Pendal employees were the largest single shareholder group, holding 14% of total PDL shares on issue, providing strong alignment between employees and the company’s growth and success.

Disclaimer: This article has been prepared by Pendal Fund Services Limited ABN 13 161 249 332, AFSL No 431426 (Pendal), It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not intended as professional advice or to be regarded as a securities recommendation. The article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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Information current as at February 2019. © BT - Part of Westpac Banking Corporation ABN 33 007 457 AFSL and Australian credit licence 233714