Riding the waves of market volatility
DUE to the heavy influx of news that we receive daily, you may have missed out on some financial news and the opportunities presented by the tremendous volatility in the US stock, mutual fund, and bond markets as well as the various upheavals in other global markets.
Market volatility persists, causing many investors to speculate about the right time to re-enter the financial markets. It is almost impossible to know when the markets will move in your favour as many pundits have been proven to be wrong in the past.
Nevertheless, many stocks, bonds and mutual funds continue to rally. Bonds in sectors such as mining and energy, retail, cruise lines and banks are doing well and are expected to continue to rise amidst the ongoing rebound in global economic activity.
We have seen several bonds with very attractive coupons being called and a few were re-issued at a lower coupon rate than previously floated in the market. Nonetheless, investors are taking up these offers because the rate of return/yield is better than having your money in a non interest-bearing account or getting .05 to 1 per cent (taxable) on your money. The fact is, we are in a low interest rate regime and investors must come to terms with that or take more risk with their funds.
WHAT SHOULD INVESTORS BE DOING AT THIS TIME?
Stay the course and try to resist buying and selling your investments based on recent changes in the market. Avoid the herd mentality which encourages you to jump into an investment when it is already doing well and then trying to exit when it starts underperforming.
This does not mean one should not try to exit a declining investment or make a play for a good product.
Keep your eyes on your objectives and make sure that you are staying abreast of the performance of your portfolio while keeping in mind how to map your goals to success. One of the cardinal sins of investing is taking on risks that do not make sense, or no longer make sense, given your situation and stage of life.
If you expect to make encashments from your portfolio within the next few years, consider holding assets that historically have been relatively liquid and less volatile than stocks, such as cash and short-term bonds or repurchase agreements. This can help you to avoid having to sell in a down market. Few investors enjoy volatility and benefit from rebalancing their portfolio in such a time. So, you must have the appetite to stomach the pitfalls as well as the gains. Having a conservative allocation generally comes with significantly less risk but be prepared for potentially lower returns. The reality is that many investors want all the upside when markets are performing well but none of the downside, which is unrealistic.
We recommend that investors hold a well-diversified portfolio with fixed income instruments. If the US continues its pace of current economic rebound, asset prices will continue to improve. However, investors can expect periods of market pullback and should therefore remain calm to weather any such storms, taking a long-term view when selecting and rebalancing portfolio assets.
Lisa Minto is the AVP, financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com. jm. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm