29/12/2022
2022 has been a bit of downer for world markets. High inflation has caused reserve banks around the world to raise interest rates and caused global markets to lose ground when compared to their 2021-year end closing values. However, times like these, serve as a reminder to all investors that volatility is something that needs to be embraced in order to reap long term gains.
Investing in falling markets is mentally challenging
Investing in falling markets like this can be psychologically difficult. Investing your hard-earned money into something only to see its value fall by more than what you added is not a great feeling. Even I’ll admit that the thought sometimes crosses my mind to hold off until things improve. Of course, this is the exact opposite of what we should be doing because falling prices mean purchasing at a discount. Also, markets can rise so quickly that by the time you’ve gained the courage to invest again, you may have missed out on most of the gains. To illustrate this point let’s take a look at the weekly closing prices and returns for VGS.AX, which I’ll use as a proxy for the MSCI index.
As we can see, weekly returns were mostly negative for the first part of the year, however in the second half of the year the majority of the weekly returns were positive. It should be noted that these gains were only driven by investor sentiment about the future of the market and not a reflection on the overall state of economy. Inflation in the US, was, and still is running at over 7.5% and reserve banks around the world were still increasing interest rates.
When rallies occur is unpredictable
Between 11/6/2022 and the 13/8/2022 the VAS.AX rose 13.9%, ($85.43 to $97.29). If an investor was sitting on cash and waited a week to invest the return would have dropped to 7.5% ($91.58 to $97.29). Given that the market price of VAS.AX was $94.25 on the 3/12, this rally shows how the 2-month period from mid-July to the mid-August was accounted for most of upward movements for the whole year. This period serves as 2022’s indication of how quickly and unexpectedly rallies can occur.
Concluding thoughts
The price movement of markets are somewhat related to the overall state of the economy and business conditions, however the timing for these movements completely unpredictable. This is largely because the market does not move based on current conditions but rather its outlook on the future; and the period in consideration could be anything from 1 day to 1 decade from now. Understanding this, for the majority of investors, the course of action that gives the best chance of capitalizing on upward price movements is to invest consistently and be patient. Remember that to reap the rewards of price appreciation it is essential to embrace volatility, and negative returns.
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Yahoo finance, 2022, Vanguard MSCI Index International Shares ETF (VGS.AX) 1/1/2022 to 3/12/2022 (Weekly), Yahoo finance, available from: <https://au.finance.yahoo.com/quote/VGS.AX/history?period1=1640995200&period2=1670025600&interval=1wk&filter=history&frequency=1wk&includeAdjustedClose=true>