Volatility in perspective
Global market swings and elevated uncertainty can be unsettling. Still, there are ways to help investors achieve their long-term investment objectives.
These principles can help investors stay calm and rational in a volatile environment.
In challenging times, it is always useful to keep a few things in perspective.
First, volatility is normal, and market declines are part and parcel of investing.
The urge to exit can be overwhelming when markets are falling, but doing so may mean selling at the most inopportune time and missing potential market rebounds. This can be costly for portfolios in the long run.
While periodic pull-backs are not uncommon, 25 of the last 35 years have ended with positive returns for the MSCI All Country World Index.
This underscores the importance of patience and perseverance to ride out choppy markets. Investors should not let short-term volatility derail their long-term investment plans and stay focused on their end goal.
Volatility is normal. As a general macro trend, annual returns of the MSCI All Country World Index were positive in 25 of the last 35 years despite average intra-year drops of 15.4%.
MSCI All Country World Index annual price return and intra-year declines (1988 – 2022)
Second, investing is about time in the market, not timing the market.
For one, the range of return outcomes narrows considerably and skews positive over longer time horizons.
It is also worth noting that over the last 72 years ending December 2022, a 50/50 portfolio of US equities and fixed income has not posted negative returns over a rolling 5-year, 10-year or 20-year investment horizon1.
While there is no guarantee of future returns, the data demonstrates the importance of staying invested and focusing on the long-term.
The longer the holding period, the higher the chances of opportunities for positive returns as the range of potential outcomes narrows.
Range of equity, fixed income and 50/50 portfolio annualised total returns, 1950-2022
Third, diversification can be useful to ease the journey through choppy markets.
Diversifying portfolios across a variety of negatively correlated and/or uncorrelated asset classes can help manage the risks during a market downturn.
As an illustration of the macro trend, a well-diversified portfolio2 has recorded average returns of around 3.9% annually over the last decade, comparing favourably with other individual asset classes.
Such a portfolio also experienced just two-thirds of the volatility of developed market equities and less than half of the volatility of emerging market equities.
As such, diversification helps not only to mitigate volatility, but to harness opportunities across various asset classes.
A diversified portfolio has posted reasonable returns with meaningfully lower volatility versus equities over the last decade.
Annualised performance and annualised volatility (2013-2022)
Positioning for resilience with income solutions
In addition to diversification, income in the form of coupons from bonds and dividends from stocks can help create a cash flow buffer for portfolios.
These cashflows can also be reinvested to help harness valuation opportunities that emerge in periods of volatility. As such, income investing helps not only to manage volatility but capture opportunities to tap the broader market upside.
Rigorous bottom-up security selection, diversification across and within asset classes, markets and sectors, and flexibility to adjust allocations are essential to building resilient income-focused portfolios.
From regional-focused funds to globally diversified fixed income and multi-asset funds, our active income solutions can help balance the search for opportunities with a focus on risk management amid elevated volatility.