Dealing with market volatility in 2023

IT wouldn’t take much for one to notice that the news headlines as of late have not been encouraging.

Investors’ mood remains quite jittery as geopolitics, monetary policies, contagion risks have all been rearing their ugly heads.   

Aside from ensuring that your portfolio of investments is appropriately diversified – what’s an investor to do in times of market turbulence like these? Opt out and remain on the sidelines? Sell out and invest another day? 

What are your investment goals – staying invested may be a better option  

We could not have said this enough, turn off the noise.

Some time ago in 2018, a sell-off in several emerging market countries, which started in Argentina before spreading to Turkey, Brazil and even Asian countries like Indonesia, brought about painful memories of the 1997 Asian financial crisis when contagion spread from Thailand.

Are these isolated cases or does the contagion risk hold enough water to sell off your equity investments?  

Take the example of a group of friends’ road trip from Johor to Perlis. Should they immediately call off the pre-planned trip because a friend’s friend shared rumours of an accident in Perlis? – the group has only just left their hometown of Johor.

What they should do is ascertain the accuracy of the information and if true, check out the facts that could affect their trip – was there really an accident, how bad was it, how will it affect their journey, how much time will it set them back and is there a possibility the ensuing jam will clear before they reached Perlis?  

What will this look like in an investment context?

Well for starters, don’t just immediately abandon your investment goals at the first sign of trouble (read: noise). A typical person may be investing for his retirement five to 10 years down the road or even for the benefit of his next generation. With that in mind, he or she should not put too much weight on the temporary fluctuations.  

Maintain the strategic asset allocation of your portfolio and avoid making drastic moves. Short-term de-tracks you from your long-term investment objectives. 

Turn off the noise and focus on the fundamentals. If indeed there are flashing warning signs, delve deeper.

However, sometimes it is best to stay the course and remain invested. Jumping in and out of the market during these major market swings is risky and ultimately detrimental to your portfolio value. Look forward to what’s ahead, in line with your long-term plans.  

Focus on the fundamentals 

Going back to the more recent fears of banking contagion effects in the US and European sell-offs on local shores and Asia, we reckon the region is now in far better shape compared to yesteryear.

The banking system has emerged stronger since the Asian Financial Crisis in 1997.

Moreover, the deeper capital markets, ample foreign reserves and lower external debt are some indications that Asian economies are on a more solid footing compared to the debt-fueled growth days of the 90s.   

Fundamentals are important – for individual stocks, conduct your own quantitative and qualitative analysis.

Key numbers and data that one may look at include the strength of the company’s balance sheet, earnings growth and margins, as well as financial ratios like price-to-book, price-to-earnings, and debt/equity ratio.

In terms of qualitative analysis, factors include the quality of the management team, the state of the industry that the company is operating in and its competitors.  

If the investment case for the company remains intact, don’t be forced into a knee-jerk reaction to sell out. It is true that during times of adverse market movements, quality companies may be indiscriminately sold down alongside inferior companies. However, when the dust settles, quality ones will usually be the first to bounce back.  

Nevertheless, if market sell-downs are keeping you awake at night and your fundamental analysis still does not stop you from having emotional roller-coasters, you may have a less aggressive risk profile than previously thought. It might be advisable to re-evaluate your current ‘riskier’ investments.

Conclusion: Seize the opportunity or employ averaging techniques 

Absent any deteriorating fundamental changes, sell-offs caused by swings in risk appetite are temporary in nature. For us, volatility and times of market sell-off present a good opportunity to acquire stock at prices that now trade far below their actual value.  

Understanding the difference between price and value is crucial. To quote Warren Buffett, “Price is what you pay, value is what you get.”  

If you are not comfortable with the notion of investing a lump sum of money during drastic market movements, try a method called cost averaging.

The strategy involves a fixed amount of money being invested at regular pre-set intervals. Given the investor’s preference on how frequently he would like the investment to be made, whether monthly, quarterly or even annually, he will be investing consistently, regardless of prices and market conditions.

Hence, broken down into many intervals, cost averaging can help reduce the risk of a single high entry point.  – June 4, 2023


Danny Wong Teck Meng, CFP is the CEO of Areca Capital Sdn Bhd and a certified member of the Financial Planning Association of Malaysia (FPAM).

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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