Volatility is part of the investment process and is an essential pillar in a “healthy” uptrend. Many times, volatility emerges, accompanied by some negative news that may concern either the global economy, a geopolitical event or anything else that may have an impact on investment sentiment.
Recently, for example, there was the Russia-Ukraine war, which led to a sharp rise in volatility and a worsening of investment sentiment, as investors were exposed to the daily flow of information on the issue.
Many times, investors are likely to get a misinformed picture of reality in the sense that the information they receive about the markets, through the traditional Media, is outdated. For example, when a news bulletin reports that markets have recorded losses, for example 3.5% in a conference, the reality may be completely different and this information may be inconsistent with reality.
For the above reasons, an investor should choose to distance himself from the news and be in constant contact with his investment advisor in order to be informed about his own investment portfolio. Because every investment portfolio behaves differently in increasing volatility and if an investor has a medium risk portfolio, then the news should leave him indifferent.
Below are some helpful tips on how to interpret volatility so you can stay cool and unaffected.
1. The media tend to refer to falling points when referring to key indices. But this is psychologically misleading because with the Dow Jones at 35,000 points a drop of 1100 points consists a 3.0% loss, when a drop of 1100 points with the Dow Jones at 13,000 points consisted almost 8.5% losses. In the current era of the Dow Jones, such a fall is a real scenario even in a day, while in the past it was an extreme case.
2. Volatility is a very important long-term investment opportunity for investors, as it allows them to be more profitable in the coming years. For example, when the VIX volatility ratio is below 15, the long-term profitability of a portfolio decreases by 3% -4% per year. Conversely, when volatility is above 30-35, the average annual profitability improves by almost the same percentage.
3. This is particularly important as the average annual profitability of the S&P 500 over the last 20 years is around 8%. So an investor who takes advantage of the negative times, can significantly increase his profitability.
4. During periods of increased volatility, it is essential that investors communicate with their investment advisors. This is because investors tend to be defensive as volatility increases, while at the moment, they may need to become more aggressive rather than defensive.
5. There are two main ways in which an investor can be adequately protected from increased volatility. First, the wide diversification of a portfolio and second, the long-term horizon. A high risk investor who has an investment horizon of more than 5 years is at low risk of volatility. As we typically believe: in the long run, all investors are conservative.
6. Over a period of at least 90 years, stocks are moving upwards at a rate approaching 80% and only 20% are in a declining market. And out of this 20%, most downturns are in the range -10% / - 20%.
Long-term investors are subject to lower volatility
From 2009 onwards, but certainly before this time too, an investor could have dozens of reasons to sell his shares and wait. However, the chart below is the best one an investor can consult.
Statistical opportunities for long-term investors
From 1930 until the end of 2021:
When the holding period of the stocks is 12 months, the stocks move upwards by 76%. (source: Morningstar)
When the holding period of the stocks is 5 years, the stocks move upwards by 90%. (source: Morningstar)
When the holding period of the stocks is 10 years, the stocks move upwards by 97%. (source: Morningstar)
Conclusion: Investing in stocks is risky in the short term. In the long run, there is a greater risk of not investing in stocks.
This article does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This email is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.