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Why you should stay calm when markets get volatile

Apr 08 2018 15:49
Werner Erasmus, Overberg Asset Management

THE last six months have been a rollercoaster ride for global and local equity markets

After a good November, the local market was shaken by Steinhoff’s accounting scandal early December 2017. This was followed by numerous reports by Viceroy Research causing several shares to significantly drop in value.

Luckily this was followed by positive news with the election of Cyril Ramaphosa in the middle of December. The market reacted positively, resulting in various SA Inc shares (such as banks, consumer goods and financial services companies) rising in value throughout most of January.

There was an air of optimism and excitement in the local market, with the JSE All Share index reaching a high of around 61 684 points near the end of January. 

But this euphoria was short lived. With signs of rising inflation in the US fears of an interest rate hike by the Federal Reserve Bank spread through the markets, resulting in a big correction in the US equity markets.

The US markets dropped nearly 10% with the FANG (Facebook, Amazon, Netflix, and Google) stocks among the worst affected.

As the saying goes, when Wall Street sneezes, the rest of the world catches a cold. And South-Africa was no exception. Local equity markets followed US markets lower despite various positives events happening in SA, such as the appointment of a new Cabinet, the strengthening rand, declining inflation, and the possibility of an interest rate cut by the SA Reserve Bank cut.

The JSE All Share index dropped from its high around end of January high to around 56 200 points by the middle of February. Again, this was followed by a modest recovery as people in the market realised there might have been an overreaction to the possibility an interest rate hike by the Federal Reserve Bank.

But the slight recovery was short lived, as the Federal Reserve Bank proceeded to increase US interest rates. As if this wasn’t enough, US President Donald Trump started proposing import tariffs on products from various countries. Fears of a trade war with China gripped the market, causing a further drop in global equity markets, including South Africa.

The events mentioned above are only a small fraction of what can happen in a short period of time in the equity markets. For the general investor these up and down market movements can be emotionally draining, especially when markets fall.

Emotions and investments 

The problem is that emotions and investments do not easily mix. Emotions, especially fear, usually cause investors to make irrational decisions which they later regret.

During volatile times it is important to remember that markets are there to be used for your benefit and not to simply inform you of the value of your investment. When you own a share, you own a piece of a business. It’s not just a piece of paper. The market is there to serve you, not to inform you. 

The market as a whole is best described by Benjamin Graham in his book The Intelligent Investor. Benjamin explains the market as follows: “One needs to see the market as grumpy, depressed, moody person. His behaviour can be wild and irrational. One day he is joyful and puts a high value on his businesses. During this time, he will only sell you a piece of the business at a very high price."

"At other times, he is grumpy and depressed and not very fond of his businesses, and is willing to sell you a piece at a cheap price. And other times he might just be stable and neutral. The problem is that one never knows in what mood he will be in. Regardless of this Mr Market will be there the next day with a new range of prices for his businesses”.

It is important for investors to stay calm during periods of volatile swings and refrain from making emotional investment decisions that could be destructive to portfolio returns.

Overberg Asset Management (OAM) is an Authorised Financial Services. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products. Views are its own. 

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