What investment strategy should I use when the financial markets are so volatile?

Stock markets globally commenced the calendar year off to a rocky start. As of January 27, the S&P 500 (a closely followed US stock market index) was down 9.80% year-to-date, and has since recovered some of the losses.

Globally stock markets have been subject to a rocky start, with the S&P 500 down 9.8% (year to date);

The sharp market volatility poses three important questions:

  1. What is causing the volatility?
  2. How long will the volatility last?
  3. What should investors do?

While there are many moving parts that affect the economy, perhaps the single biggest contributing factor to market volatility is the US Federal Reserve’s recent shift in monetary policy. The US federal reserve have changed from expansionary to contractionary monetary policy in order to mitigate rising inflation. The renewed stance by the Fed to curb the effects of inflation coupled with the quickly escalating tension in eastern Europe will have an unstable impact on trade and supply. This is because markets don’t like unexpected changes and tend to overreact in the short term. When the Fed increases interest rates, the US 10-year treasury yield increases as well, this indicates an increase in risk appetite for investors and puts downward pressure on traditional assets (i.e. stocks, bonds, and property) as investors choose investments with higher reward.

It is very difficult to predict how long the market volatility will last. The Fed may be able to successfully control rising inflation using monetary policy, however it is hard to tell whether they will execute a soft landing or spook the market. The good news, investors are not required to make market predictions or try timing the markets.

Instead, investors should ensure their investment strategy:

  1. Suits their investment/retirement planning goals
  2. Is adequately diversified
  3. Suits their time horizon and risk appetite

Rather than trying to time the markets, perhaps an impossible task, investors should spend more time invested in the markets. Investing during the current climate; as we navigate this correction/bear, may seem daunting, however, it actually presents massive opportunity for the forward-thinking investor. At Apex, our hands on investment advisers can help you take advantage of the current market to future proof your investments.

A correctly structured investment strategy is one that can withstand short-term market volatility. Historical performance data shows the aggregate stock market always increases in price over the long-term, although short-term volatility is expected. Adding additional investment units on a regular, incremental basis will help to mitigate short-term volatility. All the fund managers associated with Apex have strong governance and are all about these long-term strategies that are designed to weather market adversity. The key to market success is patience, investing across the bottom of a downturn provides the opportunity to reap rewards as the market climbs.

In summary, the recent market volatility is mostly caused by a contractionary US Fed regime shift, the effects of which may last indefinitely. Rather than timing the markets, investors should consult with their adviser to ensure their investment strategy suits their goals, is adequately diversified and fits their time horizon and risk appetite. At the end of the day, it’s all about time in the markets and not timing the markets.


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