Navigating market volatility

The wild swings in global markets can be unsettling. But volatility is normal as investing can involve significant drawdowns from time to time. Undoubtedly, almost all investors are challenged by their emotions and natural biases when making investment decisions. The impulse to get in when things look good and out when things look bad can be overwhelming, but data shows us that investors tend to pick exactly the wrong time to do so, as illustrated below.

Market timing of retail investors

Source: FactSet, Investment Company Institute, Standard & Poor’s, J.P. Morgan Asset Management. Mutual fund and exchange-traded funds (ETF) flows are through 31.12.2021. Data reflect most recently available as of 31.12.2021.

As illustrated by the blue-coloured line, US equity mutual fund inflows have tended to peak very near to when the market does - investors get caught up in the fear of missing out and put their money in right when the market is at its most expensive - and vice versa.

Be mindful of the volatility that you can handle - troubled times aren’t a sign to sell everything. Markets move in cycles and through peaks and troughs - it is almost unheard of for performance to only ever move upward. When popular signals start to indicate difficult times ahead, it can still pay to remain invested.

Staying invested matters

Various asset classes have low or negative correlation to each other. Even at times when the equity market is struggling, the bond market presents opportunities for income and yield. Fixed income comes with its own risks when rates are rising, but bonds have a role as a part of the overall portfolio to help lower volatility while seeking income opportunities.

Despite all of the difficulties faced by markets over the decade, as illustrated below, various asset classes outperformed cash over long term. A well-diversified portfolio¹ of stocks and bonds (in blue) returned an average of 7.3% per year with lower volatility (at 8.3%) than a pure equity portfolio.

Asset class returns

Source: Bloomberg Finance L.P., Dow Jones, FactSet, J.P. Morgan Economic Research, MSCI, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. The “Diversified” portfolio assumes the following weights: 20% in the MSCI World Index (DM Equities), 20% in the MSCI AC Asia Pacific ex-Japan (APAC ex-JP), 5% in the MSCI EM ex-Asia (EM ex-Asia), 10% in the J.P. Morgan EMBIG Index (EMD), 10% in the Bloomberg Barclays Aggregate (Global Bonds), 10% in the Bloomberg Barclays Global Corporate High Yield Index (Global Corporate High Yield), 15% in J.P. Morgan Asia Credit Index (Asian Bonds), 5% in Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index (U.S. IG) and 5% in Bloomberg Barclays U.S. Treasury – Bills (1-3 months) (Cash). Diversified portfolio assumes annual rebalancing. All data represent total return in U.S. dollar terms for the stated period. 10-year total return data is used to calculate annualised returns (Ann. Ret.) and 10-year price return data is used to calculate annualised volatility (Ann. Vol.) and reflects the period 31.12.2011 – 31.12.2021. Please see disclosure page at end for index definitions. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Data reflect most recently available as of 31.12.2021.

¹ For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. 

Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.

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Returns, income or yields are not guaranteed. Value of investments or income accruing from them may rise or fall.
Diversification does not guarantee investment return and does not eliminate the risk of loss.
This information is generic, not tailored to any specific individual circumstances and should not be construed as investment advice. Risk management does not imply elimination of risks. Investments involve risks and are not similar or comparable to deposits, not all investments are suitable for all investors. Please seek financial advice and make independent evaluation before investing.