Wall Street afunda com dados do emprego e tarifas. Amazon tomba mais de 8%

[Pata-Hari]

Whenever a fund puts up big numbers, investors pile in enthusiastically. But funds that generate outsized returns are almost always taking outsized risks. Once those risks become apparent and the inevitable correction occurs, the same investors often jump ship.

Tao verdadeiro!!

[nnfranco]

Do you know your own capacity for risk?

With the recent nosedive in global markets (the MSCI AC World Index has declined almost 19% in the past month ended 21 October), risk has been front and center lately. Understandably, the main risk investors have fretted about is loss of capital.

But even though your investment accounts may be down substantially over the past few months, remember that those are only paper losses. You don’t face a permanent loss of capital unless you sell.

And history is in favor of those who hang on.

As we wrote previously, markets have always moved higher over time, despite interim periods of significant losses. That’s why we’ve recommended those with sufficiently long investment horizons to hang tough and stay focused on the long haul.

Aside from capital loss, another risk that is causing a lot of anxiety lately is volatility risk. Most of us realise that stocks go up and down, but the kind of dramatic moves we’ve seen lately have tested the mettle of even the most intrepid investors.

Volatility: Accelerating the Cycle of Fear and Greed

Volatility can harm portfolios in a couple of ways. First of all, when it comes to volatility, timing is everything. All investors will undoubtedly experience their share of market turbulence, but it really matters when those ups and downs occur.

For example, volatility can be especially painful for recent retirees, who have seen their retirement savings slashed considerably over the past few weeks. Although the markets will eventually come back, retirees’ portfolios have less time to recover, and the recent downturn could have a significant impact on the amount they are able to withdraw to meet their income needs throughout their retirement.

But perhaps the most insidious aspect of volatility is its impact on investor behaviour. When markets gyrate as they have lately, emotions can get the best of investors and tempt them into making the counterintuitive move of buying high and selling low. That sort of behaviour has been in full view lately. Cash flows out of funds have hit record highs over the past couple of months, as fearful investors moved to the perceived safety of cash. But these investors are arguably selling near a market low and locking in the losses that only existed on paper until they got spooked.

We see the same sort of behaviour on the upside too. Whenever a fund puts up big numbers, investors pile in enthusiastically. But funds that generate outsized returns are almost always taking outsized risks. Once those risks become apparent and the inevitable correction occurs, the same investors often jump ship. Our research on investor returns, which are adjusted for the timing of shareholders’ purchases and sales, has shown that investors generally don’t use volatile funds well.

Investor returns for volatile funds are often significantly less than the funds’ total returns, which don’t reflect the timing of cash flows.

Know Your Risk Tolerance & Invest Accordingly

To guard against such behaviour, you need to have a clear understanding of your own capacity to endure volatility. It’s been said that if you don’t know who you are, the market is an expensive place to find out. And for better or worse, the market is giving investors a gut check right now.

To invest wisely and profitably, you need make an assessment of your ability to tolerate market downturns. Arming yourself with an honest appraisal of your capacity for risk, you can then invest accordingly. If you’re a cautious sort, it may be best to steer clear of volatile market segments, or better yet, construct a portfolio of minimally correlated assets to arrive at a volatility level you can live with.

The need to minimise volatility becomes paramount the closer you get to your investment goals. The nearer you are, the greater the role of bonds and more stable asset classes should play in your portfolio.

Sonya Morris - Morningstar Newsletter