Some people are hesitant to invest in stocks and shares due to the volatility of the market. Investec noted: “Market volatility is something we are all accustomed to, but recent events have made investors more jittery than usual. China’s ‘Black Monday’ wiped hundreds of billions off the world’s financial markets last month as shares took a beating – and investor sentiment slumped. Locally, the influence of the weak Rand has added to concerns, prompting indecision about what investment strategy to follow.”
Adriaan Pask, Chief Investment Officer at PSG Wealth added: “Reacting to market volatility based on a short-term period of discomfort can be compared to driving your car while looking in the rear view mirror – it doesn’t work too well.”
Investec pointed out: “Individual investors have a tendency to be caught up in the emotion of the moment, particularly when losses start to mount. We all know that fear and greed drive the markets – for example, bias, greed or overconfidence may see investors holding a position for too long, while the fear of loss may cause them to sell at too low a price, or exit the market too soon. In their eagerness to make money (or not lose money), they ignore some of the red flags they would pay attention to if they followed a more analytical approach, as institutional investors tend to do.”
Manage your risk
According to Pask, one of the best ways to manage risk when investing is to ‘phase-in’ your investments. “Phasing in places investors on a comfortable middle ground between being fully exposed to the market and idly sitting on the side-lines,” said Pask.
He added that “long-term investing is about time in the market, not about timing the market.” Therefore, while in the short term a phase-in strategy may not generate the return you want, over the long term, your return will grow.
“Increased market volatility leads to emotional responses like fear or jubilation, leading us to make mistakes and acting when we frankly shouldn’t,” noted Simon Brown, trader and director at JustOneLap.
The investments
“True investors don’t worry about volatility. It comes and goes. An investor with a passive long-term holding isn’t worried about short-term noise,” said Brown.
There are two general types of investments, those exposed to risk, and risk-averse investments. A person that adopts a risk-averse investment strategy favours a known rate of return, over a potential rate of return.
Brian McMillan from Investec Structured Products, pointed out: “Investors are usually faced with two typical investment choices; investment in shares - which have historically provided a better return than interest but with volatility along the way and capital at risk - or investment in, say, an interest-bearing investment or fixed deposit account in the bank. The latter provides capital protection and known interest payments.”
Investec highlighted that while you cannot predict what the markets are going to do in the future, you can use past performance as a guide to the likelihood that the markets will perform similarly in the future.