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Market volatility series part 4: How can you take advantage of the opportunities?

Billionaire entrepreneur and philanthropist Warren Buffett once told investors, “Be fearful when others are greedy, and greedy when others are fearful.” While it may seem counterintuitive to buy when everyone else is selling up, it’s important to remember that even a declining market can present opportunities.

The key is to choose a mix of investments that allows you to take advantage of all market movements – both positive and negative. Below, we explore some potential strategies for successful investing during times of volatility.

Getting value for money

The value of an individual stock is the sum of the returns it can potentially generate over the company’s lifetime. So while short-term shockwaves – such as recessions or political events – can affect the immediate returns on an asset, they won’t necessarily impact its overall worth.

 

When markets are driven lower by negative sentiment, assets can potentially fall below their actual value. These conditions may then provide investors with valuable opportunities to temporarily buy shares at a discount.

 

But be careful: this doesn’t mean you should buy anything and everything that’s on sale. For example, a company’s share price may be falling because of other factors – for example, a change in management, a new government, or a legal case – that could erode the long-term potential of those shares. With any investment, you want to be reasonably confident that its value will rise in the future.

 

Investment managers and advisers work hard to identify undervalued assets and take advantage of market dips. That’s why it’s always important to seek professional advice before you make any major investment decisions.

Keeping sight of the bigger picture

A down market offers the potential to earn greater returns than an up market. This is because – theoretically speaking – the lower your starting point, the higher your stocks can move. However, this is usually only true if you adopt a long-term investment strategy that will help you ride out any market fluctuations. Despite periods of short-term volatility, the trend in share markets is generally upwards – with shares typically designed to deliver higher returns over longer periods.

 

CSL is one example – an Australian company that started its journey under government ownership at just 77 cents per share. In its early days, no one anticipated the company’s potential. Now, CSL is one of the world’s largest makers of plasma-based therapies and flu vaccinations, and a leader in immunodeficiency and bleeding disease treatments – rising to a high of $341 per share in 2020.

 

Of course, keeping sight of the bigger picture can also mean looking at your portfolio as a whole – including the diversification of assets (like shares, property or bonds) in your portfolio and how your exposure to these investments might need to change over time to reflect your age and objectives.

Despite periods of short-term volatility, the trend in share markets is generally upwards – with shares typically designed to deliver higher returns over longer periods.

Investing in good times and bad

Even the most seasoned investor knows how difficult it is to time the market. Rather than try to predict future movements, it may help to adopt a measured approach by investing regularly over months and years – regardless of how the market is performing. So if you continue investing consistently when prices fall, you’ll be able to buy a larger number of shares for the same amount you usually invest.

 

It can also help to diversify your investments by including defensive assets in your portfolio, such as fixed interest investments and cash. These assets tend to be less dependent on market cycles, so they can provide stable earnings through periods of volatility.

 

Most importantly, remember that a financial adviser can help tailor your investment strategy to help you make the most of market movements. They can also ensure your portfolio is robust and diversified to offer protection against the impacts of market volatility.

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (CBA). Global Markets Research has given CFSIL its permission to reproduce its information, opinions, and commentary contained in this document and for CFSIL to authorise third parties to reproduce this document. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of CFSIL at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to acquire, hold, vary, or dispose of any financial products. CFSIL is a wholly owned subsidiary of CBA. CFSIL is the issuer of super, pension and investment products. CBA and its subsidiaries do not guarantee the performance of CFSIL products or the repayment of capital for investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without CFSIL’s express written consent.