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Keep calm and advise on

17 February 2016 Jonathan Faurie

There is a very famous proverb which says that the only two things guaranteed in life are death and taxes. These are good words to live by if we exist in an economic climate that is relatively stable or one that is outperforming previous benchmarks.

What the old folk failed to mention is that during tough economic times three things are certain: death, taxes and volatility. Managing volatility will determine if your investments can stand the test of time.

Don’t be the ostrich

One cannot take a head in the sand approach when it comes to volatility; it is real and it needs to be tackled head on. Andrew Davison, Head of Investment Consulting at Old Mutual Corporate Consultants, says that we experience volatility on a daily basis and we have to discipline ourselves on how we manage it.

“We are part of the global economy and the global political scene which is going through some major changes at the moment. There is a lot of news as to the state of the global investment climate, and not all of it is good news. We are bombarded with negativity, and we make emotional decisions based on these messages. We need to invest smartly among these emotions,” says Davidson.

The truth of the matter is that we are in a tough economic climate which Davison expects to last between five and ten years. During this time, returns which will not be above the price of inflation can be expected.

The corridor of uncertainty

The corridor of uncertainty is a term used in cricket for a ball that is pitched to a batsman on a length where he doesn’t know whether he should be playing off the front foot, the back foot, or whether he should be leaving the ball alone.

The same rule applies to volatility. There are a number of strategies that a fund manager can adopt when managing volatility. Does the fund manager lower the risk in order to increase the return that the client gets, or does he maintain the current risk that he is taking which would lower the returns that the client is getting. A third option is to increase the risk in order to target the same returns.

“What we need to bear in mind is that risks do not mean better returns. It merely presents an opportunity to target the same returns. We were spoilt for long periods of times when the markets were making record gains between 2000 and 2010. And like kids, we got used to this status quo and we are now panicking when the market loses traction,” says Davison.

Stay in your crease

Davison’s very simple message when it comes to volatility is to keep calm and invest on. By doing this, fund managers look at the bigger investment picture and whether the client will be achieving the goals he/she set out to achieve.

“A good investment strategy should target objectives and should be unrelated to market conditions. Panic can lead to emotional decisions, and panic by the trustees of pension funds leads to panic among fund members. We all need to be aware of our behavioural response to the current market conditions,” says Davison.

He adds that clients should be encouraged to ignore changes in values that are communicated to them on a daily, or even monthly basis. If an adviser sits down with a client and goes over the movement in their investment on a yearly basis, clients will have a better understanding on volatility and how it affects investments.

Connecting the dots

A famous philosopher once said that one cannot connect the dots in life looking forward, you can only connect them looking backwards. One has to have the trust that the dots will somehow connect and lead them towards where they want to be.

The same can be said for investing; volatility is a complex beast, one doesn’t know if it will increase or decrease over the long term and how it will affect investments. One can only look at how the market has adapted to periods of volatility in the past and what investment strategies were used to gain greatly sought after alpha.

Communication is a key ingredient to success, advisers need to keep in contact with their clients so that they will be able to make an informed choice on what the next step in their investment journey needs to be. Most importantly, advisers need to reinforce the need to focus on a long term vision and to only encourage action when it is absolutely necessary.

Editor’s Thoughts:
Keeping your head in situations like these is never easy to achieve, and understanding volatility can at times be a nightmare to explain to clients who only want to know why their investments are not growing. Advisers need to keep calm and advise on, perhaps encouraging your client to focus on a long-term plan is the best strategy to take in volatility management. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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