One of an investor’s greatest dilemmas, apart from the many others that will taunt him/her from time to time, is how to act (or react for that matter) at times of heightened volatility.

2018 had its fair share of volatility, and it could come as a surprise to some that investors make most money when volatility levels pick up and market timing becomes secondary.

If you are wondering what strategy to adopt in volatile markets, wonder no more. Just invest. Small amounts – at regular intervals and take advantage of cost average. The reason behind this is that in doing so, investors would be eliminating the thought process of market timing. Investors might think that they are smart enough to out-smart the market and invest at the right time. But truth be told, not even the seasoned investors consistently buy at the lows and sell at the highs.

In hindsight, there have been times, such as pre Lehman crisis in the summer of 2007 where an investor would have been counting his/her lucky stars for not having invested before catastrophe struck, but it would also be true that you an investor might have easily missed the opportunity to get in during the low five years before that.

There is a double-edged sword relating to market timing. Being risk averse, investors can easily avoid market crashes and emerge ‘victorious’ or unscathed, but by remaining put an un-exposed to the market investors will also completely miss out on the recoveries that follow, in terms of capital movements but also the dividend and coupon payments that go hand in hand with holding an investment.

Volatility, at times rightly so, might cause investors to shy away from the markets, but in order to achieve long-term returns, an element of risk and volatility is necessary in a portfolio, particularly as inflation ‘eats’ away at cash. Therefore volatility should be embraced and can be your friend.

I have stressed on a number of occasions that one of an investor’s greatest virtues is inevitably the ability to remain patient enough for an investment to run its course, and if investors can champion that and ignore their portfolio’s day-to-day value, volatility can be a means of achieving longer term returns via portfolio rebalancing.

However, in order for that to happen, an investor needs to be invested in the first place by holding a broadly diversified portfolio of instruments. The critical part is not whether to be invested but to ensure that during heightened times, you do indeed remain invested, and pick up stock at cheaper valuations. That is precisely how the likes of pension funds work for example by targeting a return that allows the power of compounding to work.

Investing in volatile markets is no rocket science nor does it require an ultra-complex algorithm to devise market direction. It merely requires the will and patience to decide on a solid, actionable investment plan, then ensure follow through. As we have seen over recent years, market volatility has picked up markedly; geopolitical conflicts, trade wars, weaker price of oil, stronger US Dollar impacting emerging market economies – you name it, the list is endless.

Investor instinct might be to over-react to short-term news, thereby leading investors to inappropriately alter their asset allocations, potentially harming their ability to achieve long-term investment goals. Rather than fear volatile markets, investors should maintain their composure by staying focused on their investment goals as well as long-term economic and market expectations.

This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.