If 2021 was the party in equity markets, the beginning of 2022 was the hangover. The year started off with high market volatility and large intraday moves across most markets due to concerns of inflation, increase in interest rates and now Russia invading Ukraine. This has not only caused havoc in the global markets and a major increase in oil prices but has caused wheat, maize, gold, and other commodities to rally.
During times of extreme market volatility investors often hesitate to increase their equity exposure. They question whether they should purchase more equity or wait until markets stabilise. It is impossible to know what the market will do next, but one thing is clear, equities are looking much more attractive now than they were last year. If you are a long-term investor and you have surplus funds, then you could consider investing a portion of the money into listed equities.
Events such as the one we are currently witnessing can present unique opportunities for long term investors. Decision making though is the key. The opportunity presented by the current market volatility never presents a clear path into which asset (equities, bonds, cash or properties) or which sector (industrial, technology, medical, resources, etc) to focus new investments on. One could for example stagger one’s investments in the markets over a period thereby spreading the market timing risks present in these highly volatile markets.
Short-term investors (often referred to as speculators) are focused on trying to time the markets over the short-term and this substantially increases the risk in employing a short-term investment strategy. These types of investors may miss the long-term investment opportunity that may present itself at these times.
Therefore, in times of volatility, one should focus on one’s long-term investment goals and if you can and you can see the opportunity then consider increasing your invested capital, but this approach may take some time to stabilise and to reflect the benefits.
Should you as an investor see the long-term opportunities that are presenting themselves at this time then perhaps consider the following strategy:
Consider allocating 30-40% of funds into equities and the balance 60-70% into cash assets such as money markets accounts of funds. This money can accumulate interest and can later be used to consider a higher equity position in the future whilst taking advantage of the current higher interest rates at the moment.
Stock market investing always presents risks and opportunities to investors, some of the reasons to consider the opportunities in the stock markets are:
- The global roll-out of the vaccine program has led to an increase in movement, trade, and spending.
- Globally lockdown is diminishing which has boosted travel and entertainment.
- Sectors such as biotech and commodities have thrived during the pandemic.
Reasons to feel cautious:
- Global businesses could be forever impacted by the Ukraine crisis.
- Rising inflation globally
- Supply chains have been affected around the world negatively and this is affecting the delivery of finished goods to consumers.
- Central banks unwinding pandemic support measures.
At times of extreme uncertainty, it is worth remembering markets can react in unexpected ways and can have negative outcomes. Investors should expect financial markets to remain volatile, for some time until the current Russia/Ukraine conflict has been resolved.
Successful long term investor Warren Buffett has been reported to say, “We simply attempt to be fearful when others are greedy and greedy when others are fearful.”