If you are wondering when the right time is to invest in times of heightened volatility and do not have a clear answer, you are not alone. This is a conundrum all investors face, from highly sophisticated investors to inexperienced investors. What is certain is that volatile periods provide opportunities and missing out on attractive prices might come back to haunt you if you do not take advantage, at least in small doses.

Market timing is only one of the key factors behind a successful investment decision, and I mean one of the key factors because the strength of the underlying investment is of fundamental importance. In fact, market timing comes with a so-called double-edged sword.

Investors might be fortunate enough to be highly exposed to cash at times of market crashes, but not taking advantage of dips means that those investors will also miss out on the market recoveries which ensue following a sell-off. Also, by remaining exposed to cash or money market instruments, investors are also missing out on cash flows which investments such as bonds (coupon/interest payments) and equities (dividends) have to offer. Not to mention that, at times of inflation, cash begins to lose its value.

What money managers do to take advantage of market dips is base investment decisions on “risk-adjusted return.” Volatility, which can be best described as the measure at which assets move up and down in value can thus be considered an investor’s friend. By being invested and being able to withstand the large fluctuations, volatility gives investment managers the ability to sell high and buy low. This is the strategy adopted by products such as balanced asset allocation funds and pension funds.

Managers hold a broad selection of securities but sufficient ammunition (in the form of cash) to participate when the market corrects. This enables investors achieve target risk-adjusted return which allows for the mechanics of compounding to kick in.

Large moves in the market makes every investor uneasy, even the most experienced investor. 24 August 2015 was a typical example. Whilst impulse (and inexperience) might cause investors to resort to panic selling or bold buying when the market is volatile, this behaviour could also be detrimental to investment portfolios.

It would then be important for investors to remind themselves what they really want out of their investments. For example, investing for the long term, such as for retirement, would warrant a more stable approach to investing. Trying to time the market could be dangerous and investors may miss out on possible rebounds.

Investors need to pace their investments. Market volatility provides the optimal opportunity to average down, and invest cash a little at a time at regular intervals, thereby preventing any irrational decisions. Market timing however must not be confused with rebalancing and hence must not result in the changing of changing asset mix to try to chase returns by timing market ups and downs.

Investing in volatile markets requires the willingness and discipline to decide on a solid and achievable investment plan. Over the past couple of years, volatility in markets has increased markedly and not only in equity markets but also in other asset classes such as Investment Grade bonds, commodities and currencies.

Geopolitical conflicts, the ongoing Euro area crisis as well as the highly topical central bank policies are what is keeping investors on their toes. Overreacting to short-term news could result in investors altering their asset allocations in a haphazard and unstructured manner, potentially harming their ability to achieve long-term investment goals. Rather than fear volatile markets, we would hence advise investors to maintain their composure focusing on long-term market and economic expectations.

 

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. 

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