While the markets gyrated, that’s to be expected.
It was never going to be the end of the world, despite headlines making comparisons to 2008 when Lehman Brothers went belly up.
A quick check of something I’d written about previously, the VIX or Volatility Index, revealed we were a long way from the dark days of 2008 or even the volatility of August and September last year.
The VIX intra-day high in 2008 was 89, last year it hit a high of 43, and this time around it peaked at 26.
At last check it was 17 and falling, suggesting there’s an expectation markets are becoming a little more subdued.
Not that risk aversion had subsided, recently two-year German government bonds sank to an all time low of -0.005%.
Essentially the investors buying those bonds are paying the German government to hold their money for them.
And depending on how you look at it, this could be deemed a strategy as risky as holding equities at a volatile time.
Risk aversion is usually linked to discounts in assets such as shares because fear drives people away from them, despite their expected return premiums increasing.
But when emotion gets big, logic gets small and as evidenced by those investors in German bonds, some people are prepared to swap one risk for another – money locked into negative returns.
We don’t know when the appetite for risk will return, but risk assets can stage swift recoveries.
Seeking to time an entry back into markets to capitalise on these turns usually turns out to be unsuccessful.
Emotion leaves many investors buying at the top and selling at the bottom.
The best counter for volatility and risk is to know your tolerance for these things before they’re upon you.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re the best financial adviser in Australia.
