11 Feb 2022
Key takeaways
Short-term volatility is part and parcel of the investment journey
Markets can fluctuate depending on the news flow or expectations on valuations and corporate earnings. It is important to remember that volatility is to be expected from time to time in financial markets.
History does not necessarily repeat itself, but it does rhyme. Short-term volatility can occur at any time, but they do not necessarily derail the long-term growth in stock markets. Historically, significant recoveries occur following major setbacks including economic downturns and geopolitical events (Chart 1).
While headline-grabbing news can affect short-term market sentiment and lead to reductions in asset valuations, share prices should ultimately be driven by fundamentals over the long run. Therefore, investors should avoid panic selling during volatile periods, to avoid missing out any potential market recovery.
Chart 1: Returns from $10,000 invested in global stocks over the last 2 decades
Past performance is no guarantee of future returns.
Source: Bloomberg, HSBC Asset Management as at 31 December 2023. MSCI ACWI Net Return index.
Long-term investing increases the chance of positive returns
When markets get rocky, it is tempting to exit the market to avoid further losses. However, those who focus on short-term market volatility may end up buying high and selling low. History has shown that financial markets go up in the long run despite short-term fluctuations (Chart 2).
Though markets do not always follow the same recovery paths, periods after corrections are often critical times to be exposed to the markets. Staying invested for longer periods tends to offer higher return potential.
Chart 2: Returns of different assets over various time periods since 1999
Past performance is no guarantee of future returns.
Currency: USD. Source: Bloomberg, HSBC Asset Management, as at 31 December 2023. Indices used: Equities – MSCI AC World Total Return Index. Bonds – Bloomberg Global-Aggregate Total Return Index Value Unhedged USD.
Diversification can help achieve a smoother ride
Diversification basically means ‘don’t put all your eggs in one basket’. Different asset classes often perform differently under various market conditions (Chart 3).
By combining assets with different characteristics, the risks and performance of different investments are combined, thus lowering overall portfolio risk. That means, a lower return in one type of asset may be compensated by a gain in another.
Chart 3: The performance of each asset class varies over time
Past performance is no guarantee of future returns.
Source: Morningstar, HSBC Asset Management, data to December 2023. All returns in USD, total return. Indices used: DM Equities: MSCI World Index; EM Equities: MSCI Emerging Market Equity; EMD Local currency: Bloomberg EM Local Currency Government Diversified; EMD Hard currency: ICE Bank of America Merrill Lynch Emerging Market Bond Index; Global Corporate Bond: Bloomberg Barclays Global Aggregate Corporate Bond Index; Global High Yield Bond: ICE Bank of America Merrill Lynch Global High Yield; Global Government Bond: FTSE World Government Bond Index; Property: FTSE EPPRA/NAREIT Developed Property Index; Cash: ICE LIBOR 3 Month; Diversified: 'Diversified' performance was calculated using representative asset allocation to all of the stated indices. Bond indices are hedged, ex EMD local currency (i.e. global government, global corporate, global high yield, EMD hard currency). Equities are unhedged.
Market downturns may create opportunities
Don’t be passive in the face of market declines. When market sentiment is low, valuations tend to be driven down which provides investment opportunities (Chart 4). In rising markets, people tend to invest as they chase returns, while in declining markets people tend to sell. When investors overreact to market conditions, they may miss out some of the best-performing days.
Though no one can predict market movements, the times when ‘everyone’ is overwhelmingly negative often turns out to be the best times to invest.
Chart 4: Global equities trade cheaper during economic crises
Source: Bloomberg, MSCI ACWI, data as of April 29, 2022. Past performance is no guarantee of future returns. Performance can rise or fall.
Note: Price-to-Book Ratio (P/B) is a ratio used to compare a stock's market value to its book value, calculated by dividing the stock's current closing price by the book value per share from the most recent quarter. A lower P/B ratio suggests that a stock may be undervalued.
Despite volatility
Investing regularly means continuous investment regardless of what is happening in the markets.
When investors make fixed regular investments, they buy more units when prices are low and less when prices are high. This will smooth out the investment journey and average out the price at which units are bought (Chart 5). It thus reduces the risk of investing a lump sum at the wrong time, particularly amid market volatility.
The longer the time frame for investment the better, because it allows more time for investments to grow (the compounding effect).
Chart 5: Dollar-cost averaging helps smooth the effects of market movements
The chart illustrates the comparison between investing US$1,000 monthly and making a one-time investment of US$12,000. After one year, although the total investment is the same, the number of shares purchased and the accumulated value are higher with monthly regular investments (dollar-cost averaging). In this hypothetical example, the average cost per share with dollar-cost averaging is lower than with a lump-sum investment (i.e., $0.90 compared to $1.00).
Please note that dollar-cost averaging is not always superior to lump-sum investing.
Source: HSBC Asset Management. This information is for illustration purposes only and is unrelated to any investment. Figures and rates are purely hypothetical.
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