3 ways to help manage market volatility
Betashares Senior Investment Strategist. Supporting all Betashares distribution channels, assisting clients with portfolio construction across all asset classes, and working alongside the portfolio management team. Prior to joining Betashares, Cameron was a portfolio manager at Macquarie Asset Management, Head of Product at Bell Potter Capital, working on JP Morgan’s Equity Derivatives desk and at Deloitte Consulting.
4 minutes reading time
- Australian shares
So far this year, investors have had little respite from the market volatility that characterised 2022. While volatility can make even the most experienced market watcher nervous, it’s also a reminder for investors to keep an eye on their portfolio and trust some fundamental investing lessons.
Focus on cost
First of all, with continued volatility, investors should keep a laser focus on cost within their portfolio. One area where investors might be able to reduce cost in their portfolio is seeking out more cost-effective investment products. For example, we recently reduced the management fee on the A200 Australia 200 ETF from 0.07% p.a. to 0.04% p.a. While this reduction may seem trivial in the grand scheme of a portfolio, it can add up to some serious savings over the life of an investment.
To illustrate this point, consider an example where an investor holds an initial investment of $10,000 over 40 years. In this example, if this investor had paid the average active investment management fee of 1.20% p.a.1, after 40 years of growing at a conservative 5% p.a., their investment would have been worth $44,452. But if the same investor had paid the 0.04% p.a. fee associated with A200 and received the same pre-fee investment performance, their nest egg after 40 years would have been worth $69,335– or 56% more.
At the same time, research shows that investors are becoming more cost conscious. For example, recent research from Betashares and Investment Trends2 found that 32% of ETF investors turned to the popular investment product because they are competitively priced, which is up from 29% a few years ago.
Diversify your portfolio
Market volatility is also a reminder of the importance of investors building a diversified portfolio that doesn’t leave all their eggs in one basket. In times of market volatility, diversification can reduce investment risk as different asset classes or investments don’t always perform in the same way. For example, an investment in A200 gives investors exposure to the top 200 companies on the ASX – so rather than buying one or two companies, investors can spread their exposure across a larger number of companies. So, any reduction in the value of one company could potentially be offset by the 199 others, assuming the companies are steady or growing.
At a portfolio level, diversification is the reason why investors seek to combine a range of asset classes, such as shares, bonds and cash. The idea behind this concept is that poor performance in one area of the portfolio can potentially be cushioned by better performance elsewhere – so if equity prices fall, safe haven assets like bonds may cushion the impact of any sell off in stocks. While this approach had a tough year in 2022 in terms of performance, long term historical data suggests this principle is still sound.
Don’t try to time the market
Finally, investors should resist the urge to time the market. During periods of market volatility, investors might see fit to sell down their investment portfolio after a run of poor performance. Rather, if personal circumstances allow, it could be beneficial for investors to stay in the market. In fact, key investment literature backs the idea of time in the market being a superior strategy to attempting to time market movements.
Ultimately, the reality is that market volatility is rarely a good feeling for investors. But remembering these three timeless investment lessons can help turn the noise associated with market volatility and help investors through to the other side in better shape.
There are risks associated with an investment in A200, including market risk, security specific risk, industry sector risk and index tracking risk. Investment value can go up and down. An investment in the Fund should only be made after considering your particular circumstances, including your tolerance for risk. For more information on risks and other features of each fund, please see the relevant Product Disclosure Statement and Target Market Determination available at www.betashares.com.au.
1. Morningstar Direct. Data as at 31 January 2023. Includes Open-ended Australian domiciled Australian equity large blend, large growth, large value. excludes ETFs and index funds.
2. 2022 Betashares/Investment Trends ETF Investor and Adviser Report. Survey responses collected June to August 2022.
Supporting all Betashares distribution channels, assisting clients with portfolio construction across all asset classes, and working alongside the portfolio management team. Prior to joining Betashares, Cameron was a portfolio manager at Macquarie Asset Management, Head of Product at Bell Potter Capital, working on JP Morgan’s Equity Derivatives desk and at Deloitte Consulting.Read more from Cameron.