Wendy Myers | Strategies to build wealth despite volatile and unpredictable markets

Johannesburg - Amid escalating volatility in global equity markets due to numerous factors, an understanding of the concept of volatility and how it can play to your advantage is important for investors.  

The stock market is constantly in motion, with market indices and shares fluctuating daily. During more stable periods the JSE All Share Index and the S&P500 Index, for example, gain and lose less than 1% per day. From time to time however, the market experiences dramatic price changes, a phenomenon that is known as “volatility”.  While heightened volatility can be a sign of trouble, it’s all but inevitable in long-term investing and it may actually be one of the keys to investing success.

Investors should therefore anticipate an average annual volatility of around 15%. However, approximately once every five years, there's an expectation for the market to decline by as much as about 30%. A recent case in point is the extreme volatility triggered by the Covid-19 pandemic.

It can be distressing seeing large or even small losses in your portfolio. So, if this type of volatility is a concern, you should carefully consider whether a pure equity investment suits your risk tolerance. However, it's important to remember that market volatility is a normal aspect of investing. As long as you're invested in quality companies, your portfolio should rebound in the medium term. In fact, over the long run, equities have proven to be the preferred asset class for generating inflation-beating returns. Hence, they remain a vital component of investor portfolios, particularly for those aiming to build long-term wealth.

Therefore, if you are able to stomach some volatility, the key is not to panic-sell after a big market correction. In fact, market sell-offs can present attractive investment opportunities. If you have cash available, you can increase your exposure when everyone is selling and acquire quality stocks at attractive prices. But deciding “when the bottom is” and when to enter the market in times of volatility can be very difficult, and risky. Rather, talk to your financial adviser about your overall risk exposure and profile on an ongoing basis, and rebalance your portfolio where required. This ensures that you are comfortable with the levels of exposure to risk and volatility. It is particularly important as one nears retirement age.

For those who are uncomfortable with high levels of volatility, there are ways to minimise your exposure. Multi-asset funds or a fixed income component, as part of an overall balanced portfolio, can bring peace of mind.

You should also ensure that your portfolio is well diversified, for example having an equal weighting across sectors and industries. Exposure should also include high dividend yielding stocks and stocks that are less volatile. In the South African context, think of investing in solid banking stocks as opposed to volatile commodity stocks for example. 

You could also consider certain ETFs that provide balanced returns as opposed to single stock investments for your portfolio. Ultimately, remembering to keep emotions out of investing and staying the course is critical. 

This is where a financial adviser plays a key role, providing holistic advice in the context of your long-term goals. They start with defining your risk profile upfront, allowing for a portfolio design that aligns with your tolerance for volatility. They will guide you on the mix of stocks to invest in, considering market capitalisation, liquidity, the mix of value and growth and allocations to local and offshore counters.

Your financial adviser will also be able to provide invaluable guidance on the asset class allocations within your portfolio. This includes the amount of cash one should hold, given the current volatility, as well as the preferred currencies. They will also help you build an emergency fund of cash to help ensure that you don’t have to sell your shares at the bottom to fund your cash flow requirements.

Lastly and perhaps most importantly, your financial adviser will ensure that you continue investing and they will review your portfolio regularly to ensure you remain on track to achieve your investment outcomes.

*Wendy Myers is Head of Securities at PSG Wealth.