Financial markets in 2022 have been extremely volatile, initially driven by rising interest rates, food and energy inflation and a national insurance hike, which combined squeezed household budgets further and brought down consumer confidence.
More recently Russia’s continued invasion of Ukraine, which forced much of the West to sanction the country’s powerful individuals and companies, added to the growing fluctuation and uncertainty.
UBS, the investment banker and wealth management company, provided various investment tips at times of instability.
UBS investment advice for volatile financial markets
Equity markets often overperform after volatile periods
Over the last 20 years when the VIX index, which measures equity volatility, reaches 20 or more, US equity market returns were 7% in the next six months compared with 6% at times of lower instability.
The VIX was at 25 on Monday having reached 37 at the beginning of March – its 2022 peak.
However, when interest rate expectations and bond yields climb, equities and bonds can become positively correlated.
When this occurs, like current day, other assets including hedge funds and private markets often facilitate greater diversification benefits.
Solid and pre-determined strategy
A concrete plan with short-term liquidity needs, medium-term longevity wants and long-term requirements influences sellers to hold off from panic selling and leads to increased returns.
This should prevent impulsive reactions from interfering with overall objectives and increase discipline, UBS said.
Buying low and selling high is a general rule that investors try to follow but it is often tricky to master.
In the long run, those trying to avoid downsides by selling on a drop often miss out on a large upside and damage their long-term returns.
Investing as soon as possible
It is best to plough money into markets as soon as it is feasible and for as long as possible to generate higher returns, on average.
This is especially relevant at times of volatility and for clients with excess liquidity who are considering entering markets.
Currently, investing is favourable to holding cash due to the high 7% inflation levels in the UK, which if held in liquid form would cause a deterioration in the real value of an investor’s money.
Over a five-year period, the S&P 500 outperforms US Treasury bills 78% of the time.
Risk aversion and variety
This final tip applies to all market conditions - not just at times of volatility.
Portfolio diversification is one of the most effective techniques to manage risk.
A variety of asset classes and geographic dispersion enables greater consistency of returns and absorbs risks.