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How to MANAGE VOLATILITY IN 2019

16 January

By MLC

The ups and downs of the share-market can sometimes feel like a roller-coaster, but if you take a longer-term perspective, you’ll see that it’s actually more like scaling a mountain.
 

In the latter part of 2018 share markets in the US and Australia have indeed been volatile with painful dips being followed by rapid recoveries. While news articles and feature stories may have focussed on these short-term shifts, it’s important to remember that the S&P/ASX 200 (a combination of the largest 200 companies listed on the Australian share market) has delivered returns of 9% pa since the start of 2009.

It’s easy to fall into the trap of focussing on short-term market moves, but we always suggest clients shift their focus to their long-term plan if they’re to achieve their long-term objectives.

Experienced investors know that share market falls are inevitable. Despite this knowledge market corrections, and the threat of a bear market, will obviously give many investors the jitters. So we’ve put together some tips to help you ride out volatility. 


Get a feel for what’s moving markets

Higher interest rates and a tighter money supply have represented a growing drag on the share market and it’s now starting to have an impact. The moves are mainly being seen in the US where the Federal Reserve raised interest rates four times in 2018.

The hikes have come off a low-base as interest rates were cut close to zero in the wake of the global financial crisis of 2007-09. When this wasn’t enough, the US government also began injecting even more money into the economy by buying bonds.

This did the job. It drove a rebound in the US economy and it was a big contributor to the strong share market gains of recent years.

But now, as the US government begins to remove the stimulus, we’re likely to experience a hangover from so much easy money.

The Trump trade war is another key theme that threatens to destabilise relations between the US and China. US President Trump’s preference for protecting domestic industry is an impediment to trade and could slow global growth.

This week we saw some positive news on this front, and the volatility switched to the upside. These swings are likely to continue as there is little consensus on the path of global growth in 2019.
 

Focus on market fundamentals

Markets by their nature move up and down. It is the inherent risk in the share market that draws us to it, offering us the potential for returns beyond leaving it in a bank account.

To manage volatility it’s important to look beyond the daily news feed, to ignore the froth of short-term moves and look at the fundamental health of both the economy and individual companies. Has something changed that’s likely to impact share prices in say 10 years’ time? If not, then it’s probably not worth changing your investment plan.

On many fronts the US economy looks to be strong. A December payroll report from the US showed strong jobs growth that far exceeded analysts’ expectations.

And with the extra money in their pockets, consumers are spending. US retailers reported one of the strongest holiday seasons in many years.
 

Invest for the long term

A common mistake is selling shares after they’ve taken a fall. This locks in losses and you miss any subsequent recovery in prices that most often follow a dip.

The potential for long-term gains from share markets, that outpace inflation, can only come by accepting some risk in your portfolio.

Active management of your portfolio, by a qualified investment manager, may be a way of reducing your portfolio’s risk. Active investment managers work closely with the markets day-in and day-out. They take opportunities when they arise and they also work to manage risks.

While the current fluctuations may seem like a roller coaster, if you zoom out, and take a longer-term view, you see it’s more like scaling a mountain— a steady climb upwards. While the global share market, measured by the MSCI All Country World Index ($A) lost 3.5% in the month of December 2018, it recovered more than half of those losses midway through January 2019.

For those people in the accumulation phase of their investing lives, a higher level of risk may be tolerable in aiming for healthy returns. Plus, they have the luxury of time to enable their portfolio to recover from any major crisis.

Some in retirement may be relying on income from their portfolios more immediately. If you are feeling nervous about news of market weakness, we would suggest you remind yourself of your long-term plans.

You can always contact your financial adviser to discuss your level of risk and re-appraise your risk appetite.
 

A good manager = good risk management

We’ve mentioned a number of potential headwinds that are on the horizon for markets, but it’s been clear for a long time that US rates will rise, and we’ve prepared our multi-asset portfolios by ‘defensively’ positioning them. For example cash allocations have been increased, as have purchases of assets that are differentiated from shares (such as alternatives) to reduce the impact of share market falls on your investment income and returns.

While no amount of preparation can completely remove the potential impact of a major shock, a good manager can certainly cushion the blow, and set you up to benefit from a recovery.

 

Important information
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (MLC), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (NAB) group of companies (NAB Group), 105–153 Miller Street, North Sydney 2060.  NAB does not guarantee or otherwise accept any liability in respect of any financial product referred to in this communication. 

The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.

You should obtain a Product Disclosure Statement (PDS) relating to the financial products mentioned in this communication, the MLC Wholesale Inflation Plus portfolios, MLC Wholesale Horizon Portfolios 2-7 and MLC Wholesale Index Plus portfolios issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold these products. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au or mlcinvestmenttrust.com.au MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.  The performance returns in this communication are reported before deducting management fees and taxes.

The fund referred to herein is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such fund.

This information is directed to and prepared for Australian residents only.