Why Volatile Markets Can Be An Investor’s Best Friend

Since the turn of the year, stock markets across the globe have been a hotbed of volatility. For example, the FTSE 100 has been as low as 5,640 points and as high as 6,083 points in the last three weeks. This shows that investors are nervous and that they view the future as being highly uncertain.

Of course, this is perhaps to be expected. After all, 2016 represents a year of great change for the world economy. This process started with the Federal Reserve’s decision to raise interest rates in December, with the global economy now being in a new world where all of a sudden anything could happen.

Certainly, interest rates may still be only 0.5% in the US, but the fact they rose at all indicates that the period of time when the stock market was boosted by low borrowing rates and investor sentiment was buoyed by a dovish Federal Reserve seems to be over. And with the world’s second-largest economy, China, also faltering, it has left investors feeling unsure about the future. Therefore, any positive or negative news flow, no matter how small, has been greeted with major over-reaction, as evidenced in the FTSE 100’s wild gyrations.

More volatility ahead

Looking ahead, it seems likely that the current level of volatility will persist. That’s because the uncertainties facing investors are unlikely to ease in the coming weeks or even months. For example, the oil price could realistically fall further as supply remains much higher than demand, while it may take a prolonged period of time for the market to start to feel comfortable with the idea of a more hawkish stance from the Federal Reserve.

Therefore, 2016 may be viewed as a year to stay away from the stock market. A time to stay in cash and wait for greater certainty before piling-in. While that strategy may lead to reduced paper losses in the short run, it could end up in the investor missing out on long-term capital gains. That’s because it’s during highly volatile periods when the future seems most uncertain that it’s possible to buy the best stocks at the lowest prices. As a result, the volatility seen thus far during 2016 can prove to be an ally of the long-term investor, rather than an enemy.

Of course, it’s impossible to know how long the current volatility will last and buyers of shares right now could be in for a period of lacklustre performance from their portfolios. But by taking a long-term view rather than focusing on short-term data and fears, it’s possible to build a much stronger portfolio now than when the FTSE 100 is sailing high and other investors are greedy, rather than fearful.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.