'There was always going to be a reckoning': investing amid volatility

'There was always going to be a reckoning': investing amid volatility

The latest bout of market volatility should be understood as a more logical investing environment than the past decade has been, multi-asset investors have said.

Sheldon MacDonald, Marlborough’s chief investment officer of multi-asset, said: "The levels of volatility we have seen this year have been a surprise. The decade between 2010 to 2020 lulled us into a false sense of complacency.

"Everything seemed to be going up - from stocks and bonds to collectibles, wines and cars. Even some rare Lego [models] were being priced at crazy levels. 

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"There was always going to be a reckoning; valuations had reached a point where they could not continue, and certainly not at that pace."

Alena Kosava, head of investment research for AJ Bell, said: "We are operating in unprecedented times, when financial models are struggling for direction.

"When you look at more traditional asset classes, where clients have been looking for capital protection, we have seen things happening this year that we haven't seen for some time: the effect of interest rate rises."

The volatility in government bonds seen this year has been remarkable, with extreme "turbulence" for clients, Kosava said.

According to MacDonald, this is why one diversifies: it's the one free lunch in investing, as Harry Markowitz once said. 

Paras Anand, chief investment officer for Artemis, commented that investors and advisers should have been asking: "Which environment feels more normal or logical?

"Is it the one which has an almost zero interest rate policy, and there is almost no price that is too high that can be commanded by certain assets, or is it one that has a much closer correlation between the fortunes of the underlying issuers or securities that you are investing in, and their return in the market?"

He said while this felt like a period of elevated volatility, given the background conditions, he said to an extent this should feel more of a normal environment for fundamental investors.

Indeed, taking volatility in your stride can be the investor's friend in the long term, as Kosava said. "The real value of the process tends to shine through when uncertainty is at the highest.

"Risk and return do go hand in hand - but you have to ignore the noise and focusing on the long-term horizon."

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