Expert's View 名家觀點


十二月 1 , 2018  

Learning to accept and embrace market volatility, redux


by Charles Cheng, CFA
鄭又銓, CFA



Previously, I’ve written about how keeping the long view helps investors to weather these periods of market turmoil and avoid investment mistakes. This seems like a good time to revisit that and update the figures. As markets failed to recover in November, most investors around the world have had a rough year. The MSCI World ACWI Index was down -7.4% YTD and the MSCI Emerging Markets Index was down -16.3% as of November 25th. These losses can sometimes be enough to make some investors fearful of putting too much of their savings in the financial markets. However, being under-invested can be a much costlier mistake.




In the long term, the gain or a loss in a single year does not matter as much as consistent returns over time. On average over the past century or several decades, inflation for many countries around the world has roughly been around 3-4%. At these rates, even a 30% gain on the total amount of one’s assets in a single year would be wiped out in purchasing terms within seven to eight years if the assets did not continue to be invested for a return.




While real estate investments provide somewhat of a hedge against inflation, liquid investments are also a key component to preserving wealth. However, for the average investor, financial markets tend to be extremely difficult to time, especially if one is moving in and out of their positions frequently. Research shows that flows into mutual funds are the highest during market peaks, and fewest during market lows, exactly the opposite result from good timing. Often, people are willing to take a lot of market risk after markets have gone up for a while, and completely unwilling to take risks if the markets have entered a prolonged slump. If they are too fearful or hurt due to a market decline they may never get back into the market, leading to permanent loss. These tendencies make it difficult for many investors to enjoy consistent returns.




Chart 1: Investors tend to get in and out at the worst times

Source: JP Morgan, Guide to Markets Asia 3Q 2018


The good news is that global financial markets provide an avenue for such returns, provided that one’s investment horizon is long enough, and have the ability to stay within a consistent and diversified investment plan. In Chart 2 below, we see that the combined securities markets around the world have outpaced inflation for over the past 100 years. Global markets have persevered through major wars and disasters due to continuing economic growth through capital formation and technological progress. Equities have had the highest return of all major asset classes since 1900, with the combined equity markets returning an annualized 4.4% over inflation, while bonds have returned an annualized 1.6% over inflation.

好消息是,如果一個投資者的投資期限足夠長,且能夠保持一致且多元化的投資計劃,那麼全球金融市場將對獲得這樣穩定的回報創造有利條件。 從下文的表三我們可以看到,如果把世界各地的證券市場合併來看,在過去的100年,其回報是跑贏通脹的。資本的形成以及技術的進步使得經濟持續增長,這使得全球金融市場得以在經歷過重大戰爭及災難後依舊欣欣向榮.自1900年至今,在所有主要資產類別中股票的投資回報最高。把全球股市合併來看,其年化回報在扣除通脹率後為4.4%,而債券的年化回報在扣除通脹後為1.6%。



Having a mix of asset classes also helps to make the returns more consistent over time, as in the most recent period covered, from 2000-2014, global bonds have returned 5.1% over inflation while equities returned 1.3%. It’s worth noting that the real return of equities was still positive despite the period starting with and including two of the biggest global stock market crashes ever. Starting from 1900, an investment in the global equity markets would have increased by 148 times by 2014 even after taking into account inflation.




Regarding individual countries, certain markets have outperformed the combined global markets for certain stretches of time, but tend not to have such outperformance last over all time horizons. For example, the stock markets of Taiwan and Japan outperformed global averages significantly until 1990 and then subsequently underperformed. The most consistent outperformer has been the US equity market, but even then, there is no guarantee that it will continue. Having a broad mix of countries tend to smooth out much of the boom and bust characteristics of individual markets, despite most countries being simultaneously affected during financial crises.



Chart 2: Global financial markets have well outpaced inflation for over 100 years


Real returns over Inflation:

Source: Credit Suisse Global Investment Returns Yearbook 2018


Little has changed from the last time there was a significant market correction. Investors should learn to accept and embrace market volatility as a prerequisite for beating inflation and preserving wealth. A disciplined investment plan, either self-managed or through an advisor, can help keep one consistently invested through the years by avoiding knee jerk reactions to market moves.




Mr. Cheng is a managing partner at a Hong Kong based independent private investment office. This article reflects his personal views and not his firm’s and should not be viewed as an investment recommendation.