Market volatility: Is it always bad?
Volatility in the financial markets presents opportunities as well as risks. Wells Fargo Investment Institute’s Tracie McMillion explores what it means for investors saving for long-term goals.
Volatility in the financial markets presents opportunities as well as risks and is driven by many factors. Tracie McMillion, head of Global Asset Allocation Strategy for Wells Fargo Investment Institute, discusses the institute’s report “Disruptions and Volatility” and what they mean for investors.
Q: When people see “market volatility” in a headline, they tend to think, “I’m losing money.” Is that correct?
McMillion: It’s true the word “volatility” is often used when markets fall, but what we’re saying in this report is that it can mean significant downward movement or significant upward movement, and long-term investors can take advantage of the movement regardless of the direction.
The market volatility we experienced in August 2015 and the first quarter of 2016, for example, was mostly because of what we call short-term disruptors. But there are longer-term disruptors that may offer attractive investment opportunities.
Q: What are some examples of longer-term disruptors?
McMillion: In our report, we cite economic, geopolitical, and technology disruptors, and there are long-term components of each. For example, we identify seven technology disruptors: cloud computing, cybersecurity, mobile technology, data and analytics, the internet of things (physical devices connected to the internet), 3-D printing, and wearable technology.
Each of these may present investment opportunities in and of themselves, but they also offer other types of businesses the opportunity to reduce costs, improve efficiency, or expand market share. For example, data and analytics can help companies track customer activity and increase market share. Perhaps most important, these technologies may spur revolutionary business models that serve customers in new ways.
Think of how an online video company such as Netflix or an online retailer such as Amazon has transformed their respective industries in the past five years, or the impact of Uber on taxicabs and other means of transportation. As an investor, the key is to identify disruptive trends early and realize that not all potential disruptors will succeed.
Investors who spot innovative trailblazers early can often earn attractive returns. On the other hand, you don’t want to be stuck holding yesterday’s disrupted companies.
Q: What should investors know about the relationship between volatility and disruption caused by economic or geopolitical events and trends?
McMillion: I think two important factors that contribute to greater volatility today are globalization of the world economy and the rapid flow of information around the world.
“As an investor, the key is to identify disruptive trends early and realize that not all potential disruptors will succeed.”
Twenty years ago we wouldn’t have cared if China’s growth rate dropped a percent or how it manipulated its currency. In August of last year, when China devalued the renminbi, we saw a thousand-point intraday movement in the Dow Jones Industrial Average related to fear and uncertainty about how the Chinese government was managing its monetary policy. China has become the second-largest economy in the world, and it’s a much more interdependent global economy than it ever has been before.
Also, investors are able to move money and invest across borders very quickly, and we know how fast information flows today. If you assess the multiple factors that could play into the future of the U.S. or global economy, then you can use the information about those factors to make investment decisions.
Q: What should long-term investors keep in mind about these big market swings?
McMillion: I think a key message is that when markets get scary and there’s a lot of negative volatility, be sure you maintain a balanced, well-diversified portfolio with a mix of asset types, but don’t stop investing. Expect the markets to remain volatile.
So often you see investors stop when things get rocky. But that’s exactly when you need to keep making those contributions to your retirement plan, because that’s when you’re buying low. For example, if you’re buying a stock fund and today it costs $100 a share to buy and in six months there’s a significant disruption and it costs $50 a share, you can buy twice as many shares.
That’s why we’re saying to use volatility to your advantage. Buy assets when they are on sale and have that longer-term view. Historically, difficult times have proven to be good times to invest.
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All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.