How you can stay course and survive market’s volatility
It’s easy to be distracted by news when it has items like the DGL chief executive’s apparent issue with My Food Bag’s celebrity co-founder and her company’s abysmal post-listing performance that has prompted many to condemn his actions and DGL shares to slide.*
In the wider investment world, however, market volatility is alive and well — and it doesn’t care about local issues.
Take FAANG stocks for example (referring to giants Facebook, Apple, Amazon, Netflix and Google). Four of the five stocks lagged the broad US market through May 5, with Amazon, Facebook (now known as Meta) and Netflix suffering big-time losses. The group collectively underperformed the Russell 3000 Index by 9 percentage points.
This came on the heels of a stellar decade — the FAANGs returned 28.02 per cent a year from 2012 to 2021. Their returns dwarfed the performance of the Russell 3000 Index, which returned 16.3 per cent a year. This year’s reversal is a reminder that investors should be cautious when assuming past returns will continue in the future. Of the five FAANG stocks, three have given up all their Covid returns and now languish back where they were in 2019!
For Netflix it’s a case of Back to the Future — July 17, 2017 to be precise.
Another snag in much-lauded trendy stocks is the crypto and NFT area.
These digital currencies are oft idealised by supporters as a hedge against inflation.
The thinking goes that while government-issued currencies devalue over time due to money creation by central banks, crypto resists this trend — particularly in the case of bitcoin, where there is a fixed supply of 21 million units.
The truth is not so shiny or so resistant to outside influences. Mining bitcoin becomes increasingly expensive as the amount of energy required increases each time.
Bitcoin miners have even been banned from some countries for causing energy crises — and these tend to be countries where energy comes primarily from coal or gas, meaning the whole process also comes at a huge environmental cost.
As for Bitcoin’s inflation hedge appeal, it’s not panned out well so far, dropping a whopping 46.09 per cent in the past six months. It makes a wad of Benjamins (or Rutherfords) very appealing.
Over in the US, Robinhood (roughly their Sharesies equivalent) shows the perils of the DIY investment sphere as well. Amateur day traders are facing worse losses than the rest of the market, now that business is going back to more or less normal post Fed stimulus. The average Robinhood account performance has had two years of returns erased.
Volatility is, and always has been, part of investment. While we can’t predict the direction, we can be certain upsets will happen — locally, globally and in response to various stimuli.
What matters for individual investors is whether they are on track to meet their own long-term goals detailed in the plan designed for them. Unless you need the money next week, what happens on any particular day is neither here nor there.
As to what happens next, no one knows for sure. That is the nature of risk. In the meantime, you can protect yourself against volatility by diversifying broadly across and within asset classes, while focusing on what they can control — including your own behaviour.
For those still anxious, here are seven simple lessons to help you live with volatility:
1. Don’t make presumptions
Remember that markets are unpredictable and do not always react the way the experts predict they will. Even if you could pick the turn, you still don’t know how markets will react. It’s pointless to speculate.
2. Someone is buying
Quitting the equity market when prices are falling is like running away from a sale. When prices fall to reflect higher risk, that’s another way of saying expected returns are higher. And while headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
3. Market timing is hard
Recoveries can come just as quickly and just as violently as the prior correction. In 2008, the Australian sharemarket fell almost 40 per cent. Some investors capitulated, only to see the market bounce by more than 37 per cent in 2009 and rise in seven of the eight subsequent years. The lesson is that attempts at market timing risk turning paper losses into real ones and paying for the risk without waiting around for the recovery.
4. Never forget the power of diversification
When equity markets turn rocky, other assets can flourish. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the bumps in the road.
The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers. New economic forces are emerging as global measures of poverty, education and health improve.
5. Nothing lasts forever
Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
6. Discipline is rewarded
Market volatility can be worrisome. The feelings generated are completely understandable. But through discipline, diversification, keeping focused on progress to your goals and accepting how markets work, the ride can be more bearable. At some point, value re-emerges, risk appetites reawaken and for those who acknowledged their emotions without acting on them, relief replaces anxiety. Having a good handle on your goals, timeframe and risk appetite is key to longterm success. There’s no crystal balls in investment — but sitting down with a trusted fiduciary for a chat remains a good place to start demystifying your financial future.
Stewart Group does not hold directly or indirectly any investments in DGL or My Food Bag. Just in case you were wondering.
This article was created in partnership with Dimensional Fund Advisors. 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 i https:/ /my.dimensional.com/have-thetech-giants-been-defaanged ii https://www.marketwatch.com/ story/netflix-stock-falls-towarda-5-year-low-has-lost-more-thanhalf-its-value-since-reportingq1-results-2022-05-11 iii https:/ /finance.yahoo.com/news/cryptobitcoin-inflation-hedge-231009445. html?guccounter=1&guce — referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce — referrer — sig=AQAAAA8Idbi56 — rpz1JRTfAS6sqWaz0I61FwI2PZYRfgwepvo — MaBivGa2jAS7lJVKePJJNJ6a8iotWbBDdFvO1hkar3NukyPRkK4adWBqMew2JPifXarFKpEbmEtgoK6glfQnxXPUUaiJ — Wdwj8VzkpL83GNXk2YlS — cKOoOaWlFF#:~:text=Bitcoin %20is%20often%20touted%20by, supply%20of%2021%20million %20units. iv https://baybuzz.co.nz/ bitcoin-when-gold-is-not-so-green/ v https://www.barrons.com/ articles/bitcoin-falls-to-half-itspeak-as-investors-shun-risk51652032312 vi https://www. bloomberg.com/news/articles/ 2022-05-08/day-trader-army-losesall-the-money-it-made-in-memestock-era?cmpid=BBD050922 — OUS&utm — medium=email&utm — source=newsletter&utm — term=220509&utm — campaign=openamericas