Why Looking Beyond Short-Term Swings Is Important for Investors

When considering investment risks, in our experience, many investors focus on market volatility (asset price fluctuations)—especially negative swings. Comfort with volatility is indeed an important consideration, in our view. For investors with short-term time horizons—the length of time you need your money to work—a high likelihood of volatility could work against your financial goals. Even for long-term investors, comfort with volatility is key, in our view, as sharp volatility could prompt less disciplined investors to trade at inopportune times. But defining risk as volatility exclusively is too narrow a focus, in Fisher Investments UK’s view—a focus potentially increasing other kinds of investment risk.

Risk takes many forms, and they are all worth considering. But included in that framework, we think adding a view of risk as a failure to meet financial obligations or goals helps put short-term market moves in proper perspective. For many people, that may mean the risk of having insufficient retirement funds and outliving their assets. Arguably, that could be the greatest risk of all.

We think investors can distil this further: the risk of putting assets into securities that are too low-returning. For example, placing all your savings into low-yielding government debt may not help your portfolio grow sufficiently to cover your future expenses. This could increase the likelihood your withdrawals deplete your savings prematurely, potentially leaving you in a pinch. In this way, investing in what many commentators we follow call safe assets because of their relatively low volatility may actually increase a longer-term, possibly more damaging, risk.

In our view, conceptualising risk in this way helps centre what you want to accomplish with your investments. We think knowing the purpose of your investment funds can then provide useful insight into how you approach volatility. For instance, you may have cash flow requirements—portfolio withdrawals that fund your expenses. Having an idea when those expenses will broadly come (in the short term or the longer term) can provide a general sense of how long your assets must last to meet your needs. That can then inform how you invest—and what risk trade-offs may make sense. Your risk tolerance—your comfort level with volatile swings in your portfolio—may also factor into your investment decisions.

With your end goals and risk tolerance in mind, we think investors can view volatility in context—as part of the price to pay to reach one’s personal investment goals. In the short term, prices can sway unpredictably, but swings are typically smaller for fixed-interest securities and bigger for equities. But here is the important point, in our view: Equities’ historically higher short-term volatility has usually come along with higher longer-term returns. Equities’ compounded annual growth rate—the yearly rate required to reach its ending value from inception—is 8.3%, whereas fixed-interest securities’ is 6.1%.[i]

So for investors needing longer-term growth, we think you should expect some volatility and not try to avoid or eliminate it altogether. With a long-enough time horizon and investment discipline, equities’ longer-term, higher returns—even accompanied by elevated volatility—can reduce the risk of failing to meet your investment goals.

Now, not all market downturns are the same, in our experience. Our research shows negative volatility is common in bull markets—periods of generally rising equities—and can last for days, weeks or even months. But this short-term volatility is different from a bear market—a fundamentally driven decline exceeding -20%. Bear markets tend to be prolonged, last year’s notwithstanding, in our view.[ii] Unlike short-term volatility, we think it is possible—albeit very difficult—to identify a bear market before the worst of the decline sets in. These factors differentiate it from regular negative volatility, which we don’t think investors can reliably and sustainably anticipate and avoid. Instead, if you require equity-like growth over time, we think it is wisest to endure short-term swings.

Enduring volatility probably isn’t comfortable or easy, but we think it is critical to long-term investing success. If equities’ long-term returns provide the growth you need to fund later withdrawals, experiencing short-term volatility along the way is preferable to avoiding it and falling short of your goals, in our view. Being able to differentiate volatility from a broader conception of investment risk can prepare you to resist rash actions that may set you back inadvertently.

Volatility comes with the market territory—to us, it is inherent to investing, not something to shun, but to understand. Managed properly, we think this approach can help to lower your overall investment risk.

Interested in planning for your retirement? Get our ongoing insights, starting with a copy of 10 Retirement Investment Blunders to Avoid.

Follow the latest market news and updates from Fisher Investments UK:

Facebook: https://facebook.com/FisherInvestmentsUK/
Twitter: https://twitter.com/FisherInvestUK
LinkedIn: https://www.linkedin.com/company/fisher-investments-uk

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] Source: FactSet and Intercontinental Exchange, Inc., as of 6/8/2021. MSCI World Index return with net dividends and ICE BofA Sterling Broad Market Index, 31/12/1996 – 31/7/2021.

[ii] Source: FactSet, as of 6/8/2021. Statement based on MSCI World Index with net dividends, 20/2/2020 – 23/3/2020.