Heightened volatility, but is this cause for action?
Written by Sam Barrie on February 01, 2016.
You’d have to have made a conscious effort or been living in a cave to have avoided being aware of the troubled market conditions starting off the year in 2016. Plunges in commodity prices along with a continuing slowdown in China and political instability, certainly in the Middle East, are all contributing factors for these declines, and the media seems to be full of speculation on where this will lead at present. The pessimists are concerned that this is the start of something more severe and are beginning to panic, but one looking at the glass half full could argue that lower oil prices prove a good thing for consumers. The most recent jobs report was a positive one and the Fed’s rise in interest rates is a sign of a strengthening US economy.
Many people have asked me lately whether it would be best to pull out of the market entirely and await a more stable period to ‘get back in’. JP Morgan Chase did a study over a 20 year time frame between January 1995 and December 2014 and discovered that six of the best performing days in the market happened within two weeks of the 10 worst days. This means that those investors who panicked and sold their stocks after a retrace, convinced that worse was yet to come, missed their opportunity on the subsequent upturn. The chances of correctly timing the markets over any period is extraordinarily slim and those that gloat of such timings are often simply just lucky. The willingness to endure volatility has tended to reward the disciplined investor and so it is very much ‘time IN the markets’ that is key, rather than timing the markets. It is also worth remembering that a portfolio is not invested for the short term and so any downturns should be considered a decline rather than a loss.
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. - Warren Buffet
This isn’t to say that no adjustments should ever be made to a portfolio, quite the contrary; it is clever asset class allocation which has been shown to be responsible for the majority of returns over time, and adjustments need to constantly be made to balance the correct weightings of asset classes as they fluctuate. It is also wise to make adjustments to asset class weightings based on macroeconomic outlook and we’ve seen Tilney Bestinvest reduce its equity exposure across all portfolios in Q4 of last year, which has shown good downside protection over the previous couple of months.
It is also important to match a portfolio not only to ones attitude to risk but also their desired time frame and stage in the lifecycle. For example I’d always encourage those closely approaching retirement to maintain a low risk portfolio as they simply cannot afford the risk of more significant fluctuations prior to drawing their capital.
For a review of your current portfolio or if you would like to ask any questions, please contact me.