The FTSE/JSE All Share Index (ALSI) started the year with a reasonable amount of volatility. The level of volatility experienced during the first week of January was the highest since 2008.
It is interesting to note that on 5 January, the ALSI already experienced its single biggest daily decline since 2010 – a 3,39% decline.
Avoiding risk is a risk in itself. By avoiding volatility, an investor will by implication have to invest conservatively, limiting potential returns.
Volatility often creates buying opportunities. If an investor’s retirement goals are geared towards high growth (and therefore a higher equity location), or if the investor’s risk appetite allows for some equity exposure, managing volatility is more beneficial than trying to avoid it.
How can investors manage volatility?
1. Diversification: A portfolio that is well diversified across securities, sectors, asset classes and geographies will be less affected by volatility.
2. Time and patience: Time is the most powerful antidote for volatility. As market returns revert to a mean return over time, volatility will subside.
Investors must have reasonable investment horizons and performance expectations.
3. Tactical asset allocation: Invest in products that are actively managed according to a proven tactical asset allocation strategy.
This will ensure that asset class exposures are adjusted according to market conditions.
Expecting volatility
Knowing what to expect from markets is a crucial component in anticipating potential investment outcomes.
If volatility is expected, the impact once it arrives is emotionally less taxing on investors.
Volatility is coming.
Investors will need to be more patient. Investors will still reach their long-term investment objectives despite interim volatility.
As volatility increases, dispersion of different product returns increase. Some funds perform much poorer and others much better.
It is important to find a manager that provides you confidence that volatility is well-managed.
The PSG Portfolios are well-positioned to offer clients superior relative returns, despite increased market volatility. (Adriaan Pask: PSG Wealth)
* Koos de Wet is a Financial Planner at PSG and a member of the Fiduciary Institute of South Africa. Readers can contact him at psgk@mweb.co.za
