23 May 2022

How to manage risk during times of volatility

Ukraine refugees

The Russian invasion of Ukraine has caused great uncertainty and big increases in the cost of fuel with further inflation expected

The start of 2022 has been eventful to say the least. High inflation levels kicked in on the back of Covid restrictions being lifted and this had the markets reacting with small dips.
Then in the last couple of weeks we have had the Russian invasion of Ukraine. This has caused great uncertainty and big increases in the cost of fuel with further inflation expected.

These are highly unusual events and not part of the normal cycle of economic activity and have made people nervous about their pensions and investments. Volatility is likely to remain a feature throughout 2022. During such periods of uncertainty and market volatility many investors are inclined to move to cash and then wait until things ‘settle down’ before either re-committing their funds or putting in new funds. Some investors try to predict the bottom of the market, others wait until confidence has returned before Investing.

One of the most difficult things about Investing is picking the right time to enter the market. Buying at the absolute low and selling at the peak is nearly impossible in practice. This is why so many investors adopt an approach called Euro cost averaging. Quite simply, Euro cost Averaging is a strategy which involves contributing regularly into a particular investment over a period of time. This period could be several months or years.

This strategy can help reduce risk during periods of market volatility. It is the process of buying, regardless of the share price. More shares are purchased when prices are low, and fewer shares are purchased when prices are high. The cost per share over time eventually averages out. This reduces the risk of investing a large amount in a single investment at the wrong time. 
The concept of Euro cost averaging is particularly relevant to anyone investing money into their Pension. Many pension clients make a single “Lump Sum” contribution to their Pension once a year usually around the October Tax Deadline, this is fine and its better than not contributing at all.

However, if cash flow allows it and if affordability is not an issue then maybe it would be better to spread the same value contribution equally over 12 monthly payments.
So, are there any disadvantages? Does this mean you should never invest a lump sum as part of a long term strategy?
Investing a lump sum will still be advantageous when markets rise in value over a prolonged period. Euro cost averaging should not be viewed as a way of maximising returns. Rather it should be viewed as a way of minimising risk for reluctant Investors during volatile markets.

It is also important to try to remove the emotion from your Investment decisions. For long term investors, if your personal circumstances haven’t changed and you are invested in a well-diversified portfolio then there is no need for you to do anything.  Many investors who panicked and dumped stock in 2008 and 2009 and early 2020, believing they could get back in when "the dust had settled," likely suffered equity losses without the benefit of fully participating in the recovery. 
Try not to look at your investments every day. It should be unnecessary as your financial advisor should ensure that you have undertaken a ‘risk profile’ and established how much risk you are comfortable with.
This means that in the event of volatility like we’re currently experiencing there should be no need to panic or re-balance your investment once you are in an appropriate Investment to start with.

Make volatility work for you. Try to see volatility or a period of correction as a buying opportunity. Rather than thinking of it as a 10% fall, think of it as a 10% reduction in the price of stocks so you can buy more.  At times like this people should be mindful of Warren Buffets advice “to be fearful when others are greedy and be greed when others are fearful”
In summary, long-term Investors should not panic. They should be patient & remain Invested. One of the main reasons why many Investors are rewarded over the longer term is that they tolerate this type of volatility and remain invested.

Conor Harte BFS QFA CFP® of Wealthwise Financial Planning with offices in Carrick on Shannon, Co Leitrim & Oranmore Co Galway, All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141

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