While the Omicron variant of covid-19 advances, no one knows how the crisis can evolve and what exactly the consequences of this situation may be from a health, economic and social point of view.
While equity markets lost more than 30% overall in March 2020, the implied volatilities of equities (index scarce) reached record levels even higher than the levels reached in 2008 and the spreads of higher-risk corporate bonds widened considerably, due to an upward revision of the probability of default deriving from the suspension of economic activity.
Come the phases are faced market volatility: Moneyfarm’s advice
The outbreak of the epidemic and the 18 months that have passed since then can offer interesting food for thought to understand how to best manage the phases of volatility, even the less extreme ones that every investor has to face periodically.
When uncertainty grows on the markets, the investor usually adopts one of these three behaviors: he remains invested, remaining faithful to his investment plan and perhaps continuing to invest new liquidity also through recurring payments (for example through a PAC, Capital Accumulation), or try to “beat the market”, trying to sell to anticipate the presumed negative phase and then re-enter at the moment it deems most favorable, or it still exits the market definitively, trying to capitalize on any profits accrued in the past.
The latter choice, net of the rare cases in which the invested capital becomes necessary for sudden expenses, is conditioned by very strong psychological pressures, especially when the volatility is more extreme. Nobody likes to see the value of their investments decrease or go negative and the temptation to divest or to enter and exit the market is very strong, as we noticed during the uncertain phase of March / April 2020.
While it is not surprising that the decision to exit the market, during or immediately after the outbreak of the pandemic, turned out to be the worst one because it did not allow these investors to benefit from the recovery of the following months, it is interesting the comparison between forward-looking investors and those who , more or less consciously, they tried to “beat the market” by divesting temporarily, and then trying to reinvest at a time that they judged more favorable. But identifying this moment, the really right time to capitalize on profits and take advantage of the recovery, is extremely complex and in fact the returns of these investors have been significantly lower than those of forward-looking investors.
In investments, of course, past scenarios cannot be taken as a reference to accurately predict the future. These data simply serve to realize that in phases of market volatility, even the most extreme and difficult to replicate ones like last year, acting in the wake of emotions or trying to “beat the market” can prove to be a very risky choice. A forward-looking investment strategy, which neutralizes volatility over time, and the support of professional advice that helps manage emotional pressure are the best antidote to even the most complex and unpredictable situations.