Volatility is here — but that is not the real risk for investors

As we reach the midpoint of what’s been an eventful and at times uncertain year, one thing is clear: Volatility has returned.

Global stock markets fell as much as 9 percent between January and March, with implied volatility rising to levels seen only three times since the global financial crisis. Investors with whom I speak question the impacts of a potential end to the credit cycle, the wind-down of quantitative easing, and a rise in inflation.

I’m also finding that many investors are unprepared as we enter this more volatile phase of the bull market. For instance, they are sticking to familiar assets in their home markets when they should also be looking at opportunities globally.

The real risk for individual investors is not a volatile market itself — it is abandoning long-term financial goals that align with their life goals.

This is a vital moment when investors need to remain invested and to manage risks. They should be asking themselves if they are prepared for alternating stretches of volatility and high growth, with a long-term plan in mind.

Today, robust economic expansion is translating into higher corporate earnings growth. (We estimate companies are likely to deliver 10 percent to 15 percent earnings growth globally this year.) Over the long term, equity prices tend to rise in tandem with earnings growth rates. And while risks have surfaced that could end the economic cycle, some of the best returns are made in the later stages of bull markets.

Since 1928, returns in the final year of bull markets have averaged 22 percent, versus 11 percent in mid-bull-market years. But only those with the required degree of patience and perspective realize those gains.

When we fixate on near-term risks, the chances of a costly mistake from “market timing” are higher. Since 1936, even investors with relatively good market timing — those able to consistently sell 10 months before market peaks and buy back 10 months after troughs — have still ended up worse off than investors who remained invested throughout the period.

There are a number of strategies to navigate this part of the cycle: diversifying beyond traditional equity and bond indices; reconsidering sources of yield outside of riskier companies; and looking beyond one’s home market. But investors also need to reframe their notion of risk. Risk is not about day-to-day volatility, but about whether one’s investment portfolio is on track to meet life goals that span decades.

When you reframe risk and opportunity around these goals, you can focus more on investments aligned with long-term trends, especially the dominant global themes of aging, urbanization and population growth.

For example, the latter two are increasing demand for emerging market tourism and infrastructure, making these attractive investment considerations. Similarly, the global “fintech” industry is at a positive inflection point, fueled by rapid urbanization, as well as favorable regulation and strong demand from millennials.

Sustainable investing is rapidly gathering momentum, too, particularly with a focus on themes that can enhance long-term risk-adjusted rates of return. For example, companies with high standards of corporate governance face fewer tail risks, such as large fines from regulators or reputational damage.

All of these factors show that it is not in investors’ best interests to make snap decisions based on day-to-day market movements. Times of volatility present opportunities to look at investments that others may not see or choose to consider.

As an industry, wealth managers and financial advisors need to ensure our clients avoid unwise market exits that could have a significantly negative impact. Instead, we need to help them to set the right overall asset allocation, frame their unique investment horizon, and work toward their long-term financial security.

— By Tom Naratil, co-president, UBS Global Wealth Management and president, UBS Americas.

Source: Investment Cnbc
Volatility is here — but that is not the real risk for investors