Investors can benefit from market volatility
The idea that investors need to protect themselves against market volatility is outdated, according to Grant Samuel Funds Management and Triple3 Partners.
By understanding the nature of volatility and its impact, investors could benefit from sustained portfolio diversification. However, to do so they would need first to bust the myths about market volatility.
According to Triple3 Partners’ chief investment officer, Simon Ho these myths included the following assumptions:
- The market had been volatile in recent years
- Volatility was bad for investor portfolio
- High volatility would equal negative returns
- Volatility was a good reason to say out of the market
- Volatile markets would mean a bubble would be forming
Ho also stressed that one of the most persistent volatility myths of recent times was that markets had been volatile and investors should be cautious.
“Investors suffer from recent bias and media headlines do not help,” he said.
“While there have been volatility spikes – market movements on the back of unexpected developments such as Brexit or Trump – there has been an ongoing period of volatility in the market beyond spikes of a few hours, or at most, a few days, during the past few years.”
Also, according to Ho, volatility could actually help investors enhance their portfolio returns.
“Volatility has emerged as a distinct asset class in recent years that offers a largely untapped source of alpha that can offset losses in the underlying portfolio,” he said.
“There is no question that market volatility and falling share prices can be bad for long-only investors over the short term.
“Market volatility creates opportunities for investors who short the market, and who make a call on which shares will fall in value – as well as which shares will increase.”
Ho also said that the volatility did not necessarily mean a negative return for investors as its level would tend to be negatively correlated to equity indices, indicating that when equity markets would fall, volatility would tend to rise and vice versa.
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