How to deal with market volatility

There are few things in life that are certain - death and taxes are the top two certainties, but so is market volatility. As a financial adviser, you can be assured that all your clients will have to deal with market volatility at one point or another on their investment journey. Your role is to make sure they remain focused on their long-term goals, while their investment strategy ensures they are able to achieve both capital protection and growth.

What is market volatility? In a nutshell, it is the way the markets move up and down, and the degree of deviation from expectations. While it is only natural that the markets would exhibit volatility over the short term, investors tend to react poorly by panicking and selling out of their investment at a low point. This goes directly against the sage advice of renowned investment guru, Warren Buffett, who says the key to investing is to buy low and sell high.

Financial advisers play a key role in terms of cautioning the nervous investor to stay calm and focused on their long-term investment strategy. However, this is often easier said than done. Clients need to be reassured that their investment strategy is for the long term, and that they should ignore short- to medium-term market moves because this will correct over the long term. While emotional bias is a factor that must be contended with, there are practical ways to build an investment portfolio so that you can address market volatility and ensure optimal outcomes.

The most basic tool is diversification, which means that clients are invested in different types of assets. For example, they may be invested in equity, bonds, property and cash. So, even if the market (equities) is underperforming, his portfolio may be seeing growth in another asset class, such as property. This ensures that his capital is protected against losses, and increases the potential for capital growth. While factors such as inflation, interest rates and political events are out of a client's control, they can control the amount of diversification in their portfolios, how much they choose to save and the timeline of their investment.

Another golden rule from Buffett that clients would do well to remember is, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." Fund managers invest a great deal of time and energy on extensive research and monitoring processes before they select stocks.

A second practical way to deal with market volatility is to invest in structured products, such as the Discovery Capital 200+. This product offers unlimited investment returns, as well as capital protection in negative markets. (The Discovery Capital 200+ is available as a limited offer.)

Some of the product's features include:

• If the portfolio return is positive at the end of five years, the investor will receive double the original investment, before the deduction of fees. This includes flat performance if markets move sideways, or even if there is very limited positive performance. For example, if an investor invested R1 million and the portfolio return is negative 40%, the investor receives back the R1 million original investment and capital remains intact. However, if the portfolio falls by more than 50%, the investor would be exposed to the full downturn in the portfolio.
• If the Discovery Capital 200+ global portfolio return is higher than 100%, investors will not only double the initial investment before fees, but receive all the additional upside return as well.
• There is also conditional downside protection. If the global portfolio provides a negative return of up to 50% at the end of five years, 100% capital protection is provided and the investor will receive back the full capital amount. So, if an investor invested R1 million and the portfolio return is negative 40%, the investor receives back the R1 million original investment (before fees) and the capital remains intact. However, if the portfolio falls by more than 50%, the investor will be exposed to the full downturn in the portfolio.

Craig Sher, head of product and development at Discovery Invest, says there is no currency risk, and if the rand weakens or strengthens over the five-year period, this will not affect the final return of the Discovery Capital 200+.

Investments are made as a once-off lump sum, with a minimum investment of R100 000, and the product offer closes on 22 September 2017, or earlier if capacity runs out. Sher explains that for all benefits, protection and enhancements to apply, investors must remain fully invested for the five-year period. "However, we acknowledge that personal circumstances can change, and if an investor needs to withdraw funds prematurely, they will receive back the market value of the underlying instruments at that particular time," he concludes.

This article should not be taken as financial advice and is meant for information purposes only.

Discovery Life Investment Services Pty (Ltd), branded as Discovery Invest, is an authorised financial services provider. Registration number 2007/005969/07.