Volatility brings change, but opportunity, too

WE usually associate volatility with large degree of change and fluctuations, and certainly as we approach the latter months of 2022, we can relate to this under so many aspects. 

We have seen unimaginable price fluctuations on so many of our day-to-day consumables, and as we approach the winter months this is certainly having an impact on disposable income, causing everyone to pay more attention to basic spending.

This is no different for the farming sector, where we have seen record cost hikes for basic inputs. 

The reasons for such price inflation has well been documented at this point, with a plethora of reasons identified, so hands-on management is required to maintain a viable business and work our way through the volatility.

Financial markets are no different. Again interest rates, soaring inflation, legacy of pandemic supply issues, recessionary risks in many parts of the globe, war in Ukraine, energy shortage amongst many others are all contributing factors to such fluctuations. Careful planning is key for everyone when working our way through such periods. 

This however requires some understanding of the longer term plan and having enough reserves to meet the emergency needs that can crop up due to unforeseen circumstances.

The Standard and Poor’s 500, or simply the S & P 500, is a stock market index tracking the stock performance of the 500 large companies on the stock exchanges in the United States. It is one of the most commonly followed equity indices. This too has seen huge fluctuations in 2022, equating to a -20.83% return in 2022 at the point of writing. Many are exposed to the index despite not being directly invested in same. It has always been a benchmark for monitoring performance over many decades, in fact with historical annual performance dating back to 1926. 

The performance of 2022 to date, has occurred many times over the 96 years of recorded performance. 

It is important to take longer term approaches despite the shorter term volatility, to remain committed to the longer term plan. This can seem easier said than done, hence why I referenced earlier having enough reserves to meet the unexpected costs and emergency needs without upsetting the longer term intention. However, there is always a silver lining, and this time is no different where regular investing can mean real opportunity in volatility.

For example, the Wall St Crash (1929), Great Depression (1937), World War II (1940), Tech bubble followed by 9/11 (2001), and financial crisis (2008) had a common denominator in significant volatility and market correction. However, as much as the correction that occurred in each and every one of these periods, it was followed by a significant rally in the markets shortly after, and it was more important to remain vested over this period in particular. In fact, taking the overall data available from 1926 to 2021 inclusive, it has returned in excess of 12% per annum on average over this significant period. 

The key difference in these times, is that it is so easy to get access to such funds for minimal amounts of €100 per month and this is where the real opportunity of unit cost averaging is benefiting many by averaging in throughout volatility.

Given the current rate of inflation, nil deposit rate environment, spiralling property inflation with real shortage of supply, consumers have to explore all options to try to retain current purchasing power and manage volatility. Thankfully we see on a daily basis, much more diversification both on and off the farm, decisions to manage this volatility and learn from historical trends and market cycles. It is imperative to reach out to get assistance with this planning and work our way through such periods. 

• Seamus O’Mahony, is a certified financial planner with FDC Financial Services.