Gains made in the first 10 weeks of the year have now been wiped out and a summer of uncertainty lies ahead. A combination of poor economic growth in key markets around the world and renewed concerns about the financial stability of the eurozone threatens to blow our investments off course once more.
Many investors would be forgiven for feeling a distinct case of déjà vu. March 2011 was a stellar month for many stock markets but as last summer arrived unprecedented market volatility led to investors abandoning the stock market in their droves.
Volatility is normal however, many of us still remember the eighties and nineties, where markets rose for 18 out of 20 years and assume that that is normal. It is not, that time was an aberration. The current market volatility represents a return to normality.
With that in mind, here a 5 of my top tips for surviving another volatile summer.
1. Control Your Emotions
According to Greg Davies, a behavioural finance expert at Barclays, learning to live with volatility is the best way to profit from it.
Record amounts were pulled out of equity funds last September, but if investors had weathered the storm they would have benefited from October’s terrific stock market rally.
Davies says that:
Investors often treat volatility as much more relevant and important than it in fact is, and they tend to equate it with risk. However, the two are in general quite different: risk is the chance that your portfolio has a low value when you need it, the fact that the portfolio has large or small fluctuations before then is immaterial. Volatility is only really risky if you need the money for something else in the short-term – in which case you shouldn’t have it in risky assets anyhow.
The behavioural finance expert recommended that investors control their emotional response to volatility and stick to long-term investment objectives.
2. Leave it to the Experts
If you find overcoming your own fight or flight response too difficult, pick a fund manager who thrives in a volatile environment.
Darius McDermott of Chelsea Financial Services recommended Martin Gray, manager of CF Miton Special Situations.
Martin aims to match returns in rising markets, while minimising the losses. He did well in 2008 by not holding equities but instead making money through government bonds and currencies. He has continued to be bearish for some time so the fund is well positioned today. He hasn’t owned any euro-denominated assets since 2009.
The CF Miton Special Situations fund is available through many offshore savings platforms (Generali Vision/Choice, Skandia Managed Savings/Pension/Capital Account) and is worth asking your financial adviser about.
3. Look for Income
If you cannot control the price of the underlying asset that you are investing in, then reinvesting income is one way to continue to achieve growth.
Investors should be in funds that can make money even if the stock market falls, such as high-quality corporate bond funds and funds holding shares in companies paying fat dividends. Take Vodafone for example, which is yielding 7 1/2 % or AstraZenaca which is paying out a very attractive 6 1/2%.
Fixed income was the leading asset class for the seventh consecutive month in March, with sales of £660m, according to the Investment Management Association. The strategic bond fund sector was the most popular that month. Mr McDermott tipped Richard Woolnough, manager of M & G Optimal Income, in this sector.
4. Look for Safe Havens
Gold was one of the most successful asset classes of last year, buoyed by investors rushing from equity markets to the perceived safe haven of bullion.
However, a couple of weeks ago, gold broke its three-and-a-half-year upward trend, falling in price below $1,600. It did pick up again last week are the gloomy economic news became a torrent.
Evy Hambro, manager of the BlackRock Gold & General fund, remains positive, saying recently:
The reasons for owning gold – as an alternative store of value, an alternative currency, a potential safeguard against inflation, a source of diversification – appear as relevant now as they did throughout much of 2011. Moreover, a negative real interest rate environment, such as the one most major economies are in and which looks set to persist, is typically an accommodative one for gold.
There is a risk with gold however. If the crisis does blow up and the eurozone collapses then there will be few safe havens. Liquidity will dry up and high net worth investors will need to access their money. To do so they will sell their most liquid assets, including gold.
5. Don’t Be Afraid of Cash (in the short-term)
We all know that keeping cash in the long-term is a sure-fire way to lose money as inflation erodes it. Don’t be afraid of sitting on cash in the short-term however as it will give you the means to pick up assets at better prices if markets fall further.