Volatility: How to be ready for the unexpected

  • 15 June 2020 (7 min read)

Almost every asset type experiences some level of volatility in its price over time. Lower-volatility assets may generally fluctuate to a lesser degree than higher-volatility assets, but the unpredictability of global financial markets means investors should always been prepared for bouts of volatility.

Frequently, the drivers of market volatility cannot be predicted by even the most seasoned investor. Consider, for example, a natural disaster like the earthquake to hit Christchurch, New Zealand in 2011. It was, of course, a catastrophic human disaster, but it also had an economic impact, as described in the video below:

Staying invested over the long term

So how do investors prepare for the unpredictable? The first key point is to maintain a long-term focus. There is a saying in investing that time in the market beats timing the market.

It is notoriously difficult to time the market, especially in the case of unexpected, market-moving events like the Christchurch earthquake.  An investor who dips in and out of the market to try to catch the highs and miss the lows is highly unlikely to be successful. Instead, investors should aim to stay invested for a meaningful length of time and ride out the ups and downs in pursuit of their ultimate goals.

Focusing on the fundamentals

The second point is to resist the pull of the human behavioural forces - like panic and greed – which, on the face of it, can make rational financial decisions very difficult.

‘Loss aversion’ describes the behavioural bias that could cause investors to miss out on attractive opportunities because of fear. A highly regarded study, led by mathematical psychologist Amos Tversky and Nobel Prize winner Daniel Kahneman, found that investors feel the pain of a loss twice as much as the joy of an equivalent gain.1

In investing, it is far more useful to focus on the fundamentals, not emotions. Invest only in the assets you consider a sound, long-term investment. Then, in periods of volatility, revisit the thesis to ensure the long-term prospects of the investment remain positive, once the short-term turbulence has passed.

It is helpful to remember that there are always plenty of different things going on in the world that can affect investment prospects. So, when we see markets being driven by just a single event, it is often reasonable to conclude that the impact of the event is likely being over-weighted.

Considering the earthquake example again, while it was a devastating event for the people of Christchurch and had a very real impact on the local economy, only certain sectors were directly impacted; meanwhile, in other regions and countries, the genuine economic impact was minimal.  In the long term, even New Zealand’s economy was ultimately fairly resilient.

What this means is that when we see broad-based volatility across global markets, we should ask whether the catalyst really presents a long-term threat to investments in regions, sectors and companies away from the ‘epicentre’ – not just of an earthquake, but of any single event. This kind of short-term contagion can offer opportunities to invest in assets we already like on a fundamental basis, at a more attractive price.

  • IExvc3MgYXZlcnNpb24sIEJlaGF2aW9yYWwgRWNvbm9taWNz


    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. 

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. 
    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. 
    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited. 

    Back to top