Publications
Partners
After four years of relative calm we have witnessed higher levels of volatility on global stock markets in recent times.
“This is understandable,” says Shaun le Roux, fund manager at PSG Asset Management. “Market valuations are elevated, earnings performance has generally been weak, emerging markets are struggling and participants are digesting the uncertainty that stems from a reversal in monetary policy in the US.”
There are many studies on human behavioural traits when it comes to money.
It has been widely demonstrated that we are naturally conditioned to feel the pain of losses far more acutely than we are to enjoy the joys of gains.
This trait, called loss aversion, is the reason that big sell-offs garner more attention and weigh on emotions more than gains.
Slow and steady gains on the stock market do not make for interesting headlines; crashes and panic are much more compelling viewing.
“Something that many investors lose sight of in times of volatile stock markets and sharp corrections is the fact that this volatility – which typically rises in times of uncertainty – is precisely why equities produce superior long-term returns. In other words, we need the volatility to get the returns,” le Roux says.
Volatility is an ugly thing. When the herd is panicking, there will be no shortage of commentary from bearish investors suggesting that the worst is still to some.
Sometimes they will be right. Such times are a real test of your emotional character.
“It will be impossible to cope with the emotional test that volatile markets provide if you are not clear on your investment objectives,” he adds.
If you are in it for the long haul, rejoice when the markets correct because volatility is part and parcel of the journey and is the reason that long-term returns are good.
Le Roux says that you find you really cannot stomach big declines in your portfolio value, you need to be asking yourself whether you are in the appropriate investment vehicle or asset class.
If you have a rational investment position that is aligned with your investment objective, it is important to try to remove the emotion when stocks fall and consider whether facts have changed.
If they haven’t, assess whether an opportunity is being presented to buy. If, however, the facts have changed, it is always appropriate to be prepared to change your mind.
The best investors are prepared to prey on the strong tendency of human beings to be loss averse, and exploit the irrational behaviour of the man on the street to their advantage.
The average investor of today also has a very short-term investment horizon.
This combination of short holding periods and aversion to losses is why the market pitches such fantastic opportunities in times of panic.
“Equipped with a clear investment objective, an ability to maintain emotional discipline and a willingness to take a longer-term view, volatility is definitely your friend”, le Roux concludes.
