Three lessons to help survive a volatile market

So far this year, investors have had little respite from the market volatility that characterised 2022. While volatility can make even the most experienced market watcher nervous, it’s also a reminder for investors to keep an eye on their portfolio and trust fundamental investing lessons.

First, with continued volatility, investors should keep a laser focus on cost within their portfolio. One area where investors might be able to reduce costs is by seeking out more cost-effective investment products. Even a small reduction in annual fees can add up to serious savings over the life of an investment.

Resist the urge to try to time the market. Credit:Louie Douvis

Consider an example where an investor holds an initial investment of $10,000 over 40 years. In this example, if this investor had paid the average active investment management fee of 1.20 per cent per annum, after 40 years of growing at a conservative 5 per cent every year, their investment would have been worth $44,452.

But if the same investor had paid one of the lowest fees available – such as 0.04 per cent per annum – and received the same pre-fee investment performance, their nest egg after 40 years would have been worth $69,335 – or 56 per cent more.

Research shows that investors are becoming more cost-conscious. For example, recent research from Betashares and Investment Trends found that 32 per cent of exchange-traded fund (ETF) investors turned to the popular investment product because they are competitively priced, which is up from 29 per cent a few years ago.

Market volatility is also a reminder of the importance of investors building a diversified portfolio that doesn’t leave all their eggs in one basket. In times of market volatility, diversification can reduce investment risk as different asset classes or investments don’t always perform in the same way.

For example, an investment in an ASX200 ETF gives investors exposure to the top 200 companies on the ASX – so rather than buying one or two companies, investors can spread their exposure across a larger number of companies. Any reduction in the value of one company could potentially be offset by the 199 others staying steady or growing.

At a portfolio level, diversification is the reason why investors seek to combine a range of asset classes, such as shares, bonds and cash. The idea behind this concept is that poor performance in one area of the portfolio can potentially be cushioned by better performance elsewhere – so if equity prices fall, safe haven assets such as bonds may cushion the impact of any sell-off in stocks.

While this approach had a tough year in 2022 in terms of performance, long-term historical data suggests this principle is still sound.

Finally, investors should resist the urge to time the market. During periods of market volatility, investors might see fit to sell down their investment portfolio after a run of poor performance.

Rather, if personal circumstances allow, investors should try to stay in the market. In fact, key investment literature backs the idea of time in the market being a superior strategy to attempting to time market movements.

Ultimately, the reality is that market volatility is rarely a good feeling for investors. But remembering these three timeless investment lessons can help turn the noise associated with market volatility and help investors through to the other side in good shape.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Cameron Gleeson is a senior investment strategist at Betashares.

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