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Behavioural studies suggest that the fear of loss influences most investors more than the hope of gain. This is why many investors tend to sit on the sidelines during market gyrations or even exit their investments during market sell-offs.

History shows that investing during periods of market volatility can be rewarding for long term investors. See table1.

There were 201 days, from June 2008 to June 2018, where the 10-day volatility of the MSCI Asia ex Japan Index exceeded the long term average2 by more than 1 standard deviation3. Buying into the market on those days would yield positive returns 1 year later, about 88% of the time, with the exception being during the Asian crisis from 2008-2009.

The odds appear even better when volatility rises further. There were 99 days during the 10-year period where 10-day volatility exceeded the long term average by two standard deviations. Buying into the market on those days would have yielded positive returns 1 year later, 100% of the time.

Fig1-Make-volatility-your-friend 

VOLATILITY PROVIDES OPPORTUNITIES

While history may not be the best guide to future performance, the reason why opportunities arise during periods of market volatility is behavioural-led, and hence potentially enduring. Stocks often sell off more than is warranted due to the over-reaction of investors to a particular event. Hence, it is not surprising that the same stocks can rebound once fundamental factors are considered more carefully.

It thus looks like volatility is not to be feared, but to be embraced.

HOW THEN CAN INVESTORS GET THE BETTER OF RISING VOLATILITY?

  • Consider investing (more) when market volatility is high. This however will take grit as it often goes against our natural inclinations. Beyond grit, it will also take investment expertise to identify and avoid stocks which may have been sold off for the right reasons and therefore less likely to rebound.
  • Stay invested and resist the temptation to exit the market when volatility spikes. Having a diversified portfolio as well as having some exposure to low volatility strategies can help investors maintain this discipline.
  • Having well-defined financial goals can also help investors ride through choppy markets and stay the course during turbulent times.

Find out how you can give your money a smoother ride.

  • ARTICLE
  • ASIA
  • EDUCATION
  • EQUITY
  • INVESTING
  • LOW VOLATILITY

RELEVANT FUND(S) TO CONSIDER

Eastspring Investments - Asian Low Volatility Equity Fund - ASDM (hedged)

Eastspring Investments - Asian Low Volatility Equity Fund - ASDM

Eastspring Investments - Asian Low Volatility Equity Fund - ADM

Eastspring Investments - Asian Low Volatility Equity Fund - A

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Back to Basics: Volatility

Jul 2018

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