Brace yourself…
THE past two weeks in the global financial markets have been eventful, to say the least. In the United States, chairman of the Federal Reserve Jerome Powell indicated that interest rates were likely to go higher than previously anticipated, with higher-than-expected incremental rate increases. Financial markets were immediately affected by Powell’s comments. Later in the week there was news of bank failures in the United States with Silicon Valley Bank being the first followed by Signature Bank. Investors saw high market volatility in both the equity and fixed income markets.
In Europe, the European Central Bank (ECB) increased three key interest rates by 0.50% (50 basis points) to continue its quest to control rising inflation, despite news of challenges being faced by one of the largest banks in Europe, Credit Suisse. These events further affected financial markets and fuelled global asset price volatility.
Market volatility is commonly viewed as a negative by many investors; however, despite the negative effects on portfolio valuations, it also presents investment opportunities for those who prepare in advance.
Having access to cash when an opportunity arises is of paramount importance in being prepared. This will allow you to capitalise on an opportunity before it disappears. In volatile markets an opportunity may appear only for a short time because of fluctuations in the market prices of assets. When the price of an asset falls to levels where it is being undervalued, a buying opportunity exists and people with access to cash can take advantage quickly. As the asset revalues to its fair value or becomes overvalued, the opportunity would have been missed by those who were not able to take advantage of the opportunity quickly.
Investors should look for opportunities to make new investments, as well as opportunities to apply the principle of “dollar-cost averaging”.
For new investments, the investor can buy undervalued assets and sell when prices are higher to take advantage of capital gains. Investors in the fixed income market, with a longer investment horizon, can apply the same principle of adding new bonds to their portfolios. Buying underpriced bonds allows the investor to lock in attractive yields which would have not been available if the prices in the market were higher. Over the long run, they can benefit from both higher yields and capital gains at the time of sale or maturity.
As asset prices fall during volatility, an investor may see the value of their investment portfolio also falling as it reflects the current prices. An investor can capitalise on the opportunity to dollar-cost average or average down on their current holdings. Buying additional units of an asset at lower prices will reduce your overall per unit cost. As prices appreciate, the investor’s total holding of this asset will return to a profit position more quickly than if they were only still holding the higher-priced units of an asset. This can also be done periodically as it may be difficult to time the market and determine when an asset is at its lowest price. If you are prepared, take the buying opportunity and if markets go even lower, buy more to reduce your cost per unit even more for greater future benefits.
Volatile markets can be nerve-racking, but if you are prepared you can take advantage of opportunities. Always speak with your licensed financial advisor to prepare for and identify the opportunities.
Dwayne Neil, MBA, B.SC. is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. 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.