Market volatility is a measure of the variance of returns on a market index or fund, over a given period. Typically, high volatility is associated with high risk and unpredictability. Market volatility can naturally cause anxiety for an investor and requires much self-discipline and maturity to remain within their investment strategy.
It is important for investors to understand that performance is cyclical in nature. There are various factors that may cause this, including inflationary pressures, geopolitical events, monetary policies, etc. These are essentially a collection of factors beyond anyone’s control, many of which we are currently experiencing simultaneously. As one wades through these various market cycles, it is near impossible to predict when the market will turn, for better or worse.
Naturally, a bear market will not instil positivity within an investor. However, it is key to remember that a bear market can in fact be used as a great buying opportunity. You are able to invest in shares that are undervalued, therefore providing opportunities to invest in high quality companies at a lower price.
Let us illustrate this concept using Absa Group Ltd as an example. Around March 2020 when markets suffered massive losses due to the onset of COVID-19, the Absa share price declined significantly. 36ONE took this opportunity to buy the share at depressed levels. By taking the opportunity to purchase a quality company at a low price, we have managed to own a stock that has returned close to 100% since.
Had one decided that because the market was down in March 2020 and you would rather wait for more certainty, you might have only bought the share at a higher price during its recovery phase, and therefore missed out on significant gains.
Due to the boutique nature of our business, 36ONE is able to move in an agile manner and act on opportunities amidst volatility. As in the example of Absa, we were able to execute major buys and sells on the share at opportune moments. This agility has contributed significant alpha to all of our portfolios.
It is understandable that emotions can get the better of you when it comes to managing your hard-earned money. The majority of people intend to buy low and sell high, however, they get caught up in the volatility, with the result exactly the opposite of the intention. Investors who withdrawal their money from the market in volatile times risk missing some of the largest gains.
Below is an example provided by JP Morgan showing how a $10,000 initial investment performed over a 20-year period where a) an investor stayed invested or b) missed some of the market's best days:
| 4 January 1999 to 31 December 2018 | Dollar Value | Annualised Performance |
|---|---|---|
| Fully invested (S&P 500 index) | $29,845 | 5.62% |
| Missed 10 best days | $14,895 | 2.01% |
| Missed 20 best days | $9,359 | -0.33% |
| Missed 30 best days | $6,213 | -2.35% |
| Missed 40 best days | $4,241 | -4.20% |
| Missed 50 best days | $2,985 | -5.87% |
| Missed 60 best days | $2,144 | -7.41% |
As can be seen, if an investor stayed fully invested they would have earned an almost 200% return, but if they missed the 60 best days (which is only 1.2% of the 20-year period) they would have lost nearly 80% of their initial investment!
The goal is to keep calm and entrust a professional fund manager to safeguard your investments. 36ONE Asset Management has exhibited the expertise, experience and dynamism to manage money through both good, bad and volatile markets as evidenced by our excellent long-term track record.