Current Volatility in Markets
In our January update, we made the following comment about the 2018 outlook.
‘…….we would expect bouts of volatility in financial markets to be a feature this year. And we certainly cannot rule out a major correction……’
The volatility has shown up maybe a little earlier than we might have anticipated, but it certainly made its presence felt over recent weeks, with the major markets experiencing falls of between 2-5% over a few days. Our general advice to clients is unchanged in light of these developments and our view is encapsulated in the following simple points.
- Investors should expect repeated bouts of volatility over the coming months.
- Although it has been largely absent in recent times, volatility is to be expected in equity markets over the long term.
- History has repeatedly taught us that, for long term investors with diversified portfolios, the most appropriate response to volatility is to ignore it.
- Unless you can see a need for cash within the next three years or so, selling is the wrong decision.
- In fact if there is a significant correction, it will probably make sense to buy at that time.
So how has our Cash Alternative Strategy performed?
Harvest launched its Cash Alternative Strategy in 2017 in order to provide clients with a low risk option for their longer term cash holdings. With deposit interest rates hovering just above zero, cash was simply not going to deliver the level of longer term growth required for client pension and approved retirement funds. The strategy comprised an equal weighting of three international investment funds all of which offered the following three key characteristics (i) a track record of low volatility (ii) consistent annual income of 3-4% (iii) daily liquidity.
The recent bout of market volatility has been the first real test of the strategy in terms of how it might perform against a backdrop of falling equity markets.The point to remember is that this is a ‘low’ volatility strategy and not a ‘no’ volatility strategy, so we would not expect it to be completely immune from short term market movements.
Since the start of the year equity market weakness has ranged from -1% (US market in euro terms) to -6% (UK). In comparison, the Harvest Cash Alternative Strategy is down by 0.8% over the first two months of 2018. So we are happy, based on this evidence, that the strategy is doing what it says on the tin. Going forward, we can however, be certain about a couple of points, firstly there will be more volatility over the course of this year and secondly, this strategy, while it does not offer a full protection against such volatility, we would expect it to perform relatively well in these circumstances.
As always, you should only consider the investment views contained in this update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you have any queries in relation to your investment, please contact your Harvest Financial Services’ Client Manager or call us on 01 2375500.
Terry Devitt -Investment Director