Investors Should Not Fear Volatility

Morningstar Investment Management’s Michael Keaveney reminds investors that short term downturns are not an aberration, but rather a feature of equity markets.

Michael Keaveney 22 November, 2018 | 6:00PM
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Michael Keaveney: Despite a modest rally in the last few days of October, Canadian equity investors have suffered short term losses beyond what they may have grown used to over the past few years.

The S&P/TSX Composite Index is down the better part of 6.5% for the month of October 2018.

In the wake of this volatility, there’s naturally concern among many investors for the health of their portfolios.

But let’s acknowledge that short term downturns are not an aberration. In fact, they are a feature of equity markets.

As the graph shows, every year since 1980, the Canadian Equity market has had at least 1 calendar month where the returns were negative.

If you were to count up all these instances of monthly negative returns, you’d see that over 40% of the months since 1980 have had a return below zero.

We’ve actually had it pretty easy in the Canadian Equity market over the last couple of years, when it comes to both the frequency and severity of down months.

In 2016 and 2017, there were generally fewer down months for the overall market than typical, and none that were worse than a 5% drop.

2018 has been a return to both higher frequency of monthly drops by comparison, and marks the first time since 2012 where there has been a drop of over 5%, and that is this most recent month.

The 2018 figures are to the end of October, so it is possible that the total number of negative months for this year could climb, with November and December yet to come.

Perhaps we, as investors, have been lulled into complacency after several years of relatively modest frequency and magnitude of downturns.

It’s prudent to remind ourselves that volatility is part and parcel of equity investing. Long Term investors should look beyond the monthly noise, and focus on the returns that are more likely to unfold over extended periods.

And Valuation Driven investors can also take advantage of the noise, and choose to make further investments in areas which may have been driven below a fair assessment of value due to short term sentiment.

For Morningstar Investment Management, I’m Michael Keaveney

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About Author

Michael Keaveney

Michael Keaveney  Michael Keaveney, CFA, is Director, Investment Management at Morningstar Associates, Inc.

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