Beyond Bulls & Bears

Perspectives

Keeping Calm When Volatility Strikes

The recent declines in the global stock markets can lead to a lot of questions and concerns about what investors should do. Considering the market has been on a historic run to continuous record highs and double-digit gains over the past year, it’s not entirely unexpected to experience a pullback.

At Franklin Templeton, we’ve been investing in global markets for more than 65 years, across bull and bear markets alike. We know that while volatility can be unnerving and confusing, it can also be a time of great opportunity for investors.

Even the most experienced investors can get spooked by heightened volatility in financial markets. When stock prices are tumbling, the urge to do something—anything—can be overwhelming. Our experience has shown us that selling is not always the most appropriate response to market turmoil.

This engaging and entertaining video on “herding behaviour” outlines why following the crowd may not be the most prudent approach to investing success.

In fact, there may be occasions when periods of heightened volatility present a good opportunity to think again about buying.

Here’s a look at how investors adjust their expectations based on market conditions that puts some perspective on what realistic investment returns might be after the type of run equities have had.

It’s clear that no one wants to lose money when investing—that’s not the goal. But keeping sight of goals and sticking to a well-defined plan can help. This short, animated video on loss aversion offers some clues into why many investors start to panic when short-term market corrections hit, and why emotionally driven behaviours can be detrimental to reaching one’s long-term goals.

Managing Expectations, and Mapping out the Risks

At Franklin Templeton, we think mapping out long-term investment goals and working with an advisor is the best way to manage expectations.

Our Multi-Asset Solutions CIO Ed Perks, Head of Equities Stephen Dover and Templeton Global Macro CIO Michael Hasenstab recently recorded a podcast discussing the changing fiscal and monetary policy conditions in the year ahead. While they remain optimistic about the global fundamental backdrop, they point to risks and opportunities they see. We think it’s worth a listen to put the market’s current volatility into perspective. They say this is a time to be relatively nimble in portfolios and have the flexibility to adapt to changes that are likely coming.

One thing we have learned over more than 65 years of global investing experience is that trying to predict market declines or rallies is not the path to long-term success. Much more important, in our view, is preparing for incipient shocks smartly and strategically.

Managing risk is at the heart of our investing ethos. Our experience tells us that it is often during the most intense market turmoil that skilled investment managers get their chance to shine.

Recently, Tilak Lal, vice president of Performance Analysis & Investment Risk at Franklin Templeton, penned a piece on just that subject. In “A Story of Risk Management, and Flying to the Moon,” he describes the parallels of managing the risk of space travel with investment management, stating, “as investment managers, we are risk managers.”

While volatile markets occasionally present a challenge for global investors, it is our view that a knee-jerk reaction is rarely the best response. With careful consideration, the benefit of experience and an active approach, we believe periods of market turmoil can often be a time of great opportunity.

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The comments, opinions and analyses are the personal views expressed by the investment managers and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

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 What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.