ONCE you are part of the investment world you will quickly come to realise that investment returns are unpredictable and volatile. This is true at all times — during peace and war, boom and bust, summer and winter.

The recent market volatility is not just because of the geopolitical tensions, but because of a combination of an already fragile situation. The market was already in a downturn due to inflation and the expectation of rising interest rates. Putin’s invasion of Ukraine just exacerbated matters because, if it’s one thing financial markets hate it is uncertainty — and no one knows how this will all play out.

Unfortunately, there is no proven strategy for predicting the inherently unpredictable, nor is there a proven strategy for eliminating inherent volatility. However, there are proven strategies for coping with both unpredictability and volatility. Those strategies are diversification and patience.

Effective diversification requires selecting investments that tend to have returns that move independently of one another. This can be done by investing in different asset classes — for example, a mix of stocks and bonds. In addition to diversifying among multiple types of assets, it is also usually a good idea to diversify within those asset classes. For example, an investor can add diversification within a portfolio of bonds by selecting individual companies from different industries and different countries/regions. The practice can reduce the volatility of your portfolio because when one asset is falling, others may be rising, offsetting some of the losses on the declining asset.

Patience requires having an investment plan along with a diversified portfolio, and recognising that diversification works. Overreacting to current events and selling investments that are down now and then jumping back in when they start going back up, in other words selling low and buying high, is the opposite of how to make money! If it is a medium-to long-term investment and the fundamentals are still good, patience is a virtue.

This is easier said than done, though. Diversification and patience are difficult strategies for us because they seem to be so passive, and we are emotional beings — we want to act, not wait. But data are strongly in favour of diversification (many different securities, not few) and patience (not market timing or day trading). Diversification and patience are the right strategies in these times of war and uncertainty.

The good news is that, based on history, war and conflict bring sudden market downturns, varying in their degrees and depths. But usually the recovery is relatively solid and forecastable. Therefore, this armed conflict and the effect it has on the market should be viewed as a buying opportunity for quality investments and a chance for a “gut check” on your financial plans.

If you do your research and are guided by your licensed financial advisor, you will find that the adage “it’s a good idea to buy when there’s blood on the street” is usually, quite literally, true.

Toni-Ann Neita-Elliott, CFP is the vice-president, sales and marketing at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

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