Uncertainty, Volatility and Opportunity

We all agree that we are living in unprecedented times. Back in February and March, financial markets reacted very negatively in anticipation of a deep economic recession. For the seasoned investor, volatility spikes are not news, even though we have not had this kind of volatility in years. The drastic fall in markets is a result of huge future uncertainty and market volatility is an investor’s worst nightmare. But, if we are prepared and know how to resist the emotional response, then we can keep calm when a storm comes – and even find opportunities.

The financial crises of 2008 and the recession that followed is still fresh in the memories of many investors. Back then investors saw their portfolios experience heavy declines. Instead of acting rationally during severe bear markets, many investors tend to overreact and make matters worse. However, while many people panicked or were forced to sell assets at low prices, a small group of patient investors saw the stock market collapse, as an opportunity to go back in the market at discounted prices.

Investing during a crisis is risky, for the timeline and scope of a recovery is uncertain. Huge declines are a real possibility, and attempting to pick a bottom is almost impossible. Still, those investors who are able to invest in a crises without succumbing to additional fear and anxiety may secure good returns during a recovery.

Financial theory says that one should not sell when the value of investments is low. Yet, people often behave irrationally and let emotions get in the way, especially when the future is not clear and fear hits home. The emerging field of bahavioural finance attempts to describe how people actually behave versus how financial theory predicts they should. Behavioural finance shows that people, rather than being merely risk-averse, are actually more loss-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit. Not only that, but loss-aversion describes peoples’ tendency to sell winnings too early and to hold on to losses for too long; when people are in the black, they act risk-averse, yet when they are in the red they become risk-seeking.

While most investors panicked as asset prices plummeted, those with a cool head were able to see the resulting low prices as a buying opportunity. Buying assets from those restless individuals driven by fear is like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels. Profiting from investing in a crisis requires discipline and patience. With some sound financial advice, investors with liquid assets can take advantage of below average prices.

In the current market conditions, investors should keep it simple and try not to be selective on individual bonds and shares because it can be risky. Investing in a diversified portfolio is key to avoid high exposures to single companies and sectors. Various actively managed funds offer the well-needed diversification one would require during volatile periods. In addition, various funds offer higher liquidity than some sectors of the market which sometimes come to a complete halt.

Before the Covid-19 pandemic started, financial markets were in the midst of a bull market following the great recession of 2009. Those who have not panicked saw their portfolio recovering significantly the losses sustained during the recession. The situation is different for investors who chose to sell their investments or were forced to sell and waited until the market has recovered.

In a market period such as the current one, market fluctuations are unavoidable. Instead, investors should always try to see what is presented to them as an opportunity—a chance to learn about how markets react to events surrounding a bear market and how central bankers and governments react during such periods.

Investors might be tempted to sell their investments in a bear market and keep the majority of their portfolio in cash, which can be a bad idea. An investor who did not sell any of their holdings, in the 2009 recession, would have seen their invested money return to its former level within a few years and surge in value over the next half a decade.

On October 16th, 2008 at the start of the market recession around the world, Warren Buffet wrote: If you have the cash to invest in stocks, the best time to do it is when everyone else thinks the world is about to end.

In a market cycle, recessions are inevitable but so are their recoveries. Investors may take difficult times such as current market conditions, to acquire more knowledge on market behavior. One can learn that keeping calm and not letting emotions take control will pay off down the road, because another bull market is always on the horizon. The bottom line is that history gives us a clear picture of what happened in the past. It is our choice to do what we ought to do, when opportunities in hard times present themselves.


Adrian Mifsud, Cefa, Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]