Newspaper article The Journal (Newcastle, England)

Becalmed in a Teacup: Preparing for Volatility in the Future; SHARE WATCH Neil Warwick

Newspaper article The Journal (Newcastle, England)

Becalmed in a Teacup: Preparing for Volatility in the Future; SHARE WATCH Neil Warwick

Article excerpt

INVESTING is an emotionally uncomfortable activity regardless of market conditions - and being in the market right now may feel a little more awkward than it has for a while.

For the first time since 2006, we've had a relatively prolonged period of market calm and consistent returns. But rather than enjoying the absence of the daily swings between 'risk-on' and 'risk-off', many commentators seem to be getting increasingly nervous about the calm itself.

For a long-term investor, volatility - be it high or low - is considerably less important to overall portfolio performance than the media often implies. The word volatility tends to have negative connotations for investors. In particular, many private clients understandably associate higher volatility with the potential for greater losses or, at the very least, the risk of more uncertain returns.

In reality, this is only really completely the case in the short term. Over medium or long-term time horizons, volatility may be only very loosely connected to investment performance or risk.

Theory will likely be of little immediate consolation to investors when volatility does return to more normal levels. However, although some returning volatility across asset classes will make the investment ride less comfortable, it is unlikely to make the destination any different in the mid-to-long term. Low volatility may well be a sign that the markets are complacent about short-term prospects, but volatility tells you almost nothing about the long-term value of being invested. In short, people are getting themselves worked up about good news from a measure that doesn't matter very much.

Volatility has a great deal of short-term emotional resonance, but is largely disconnected from your long-term performance. I use the word 'largely' because, while volatility will have little effect by itself, its influence on your investing behaviour can have huge long-term consequences. …

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