AMP Capital chief executive Shane Oliver said volatility is expected to remain higher for a while compared with the calmer 2012-14 period; however, volatility is different to the risk of investors not meeting their investment goals.
Mr Oliver said volatility is an “unexpected deviation in the path to an investor’s destination [or their] investment goal”, while risk is the probability of not reaching that destination.
“In other words, there is much more to risk for investors than volatility,” he said.
It is also important to note that Mr Oliver said volatility often indicates opportunities for investors as it “invariably surges during share market slumps like those seen into 2003 and 2009, as this is when shares are selling cheap”.
“In fact, periods of low volatility when markets are smooth and investors relaxed can be periods of maximum risk.”
Time can also smooth out short-term volatility, said Mr Oliver.
“For example, while share market returns can be highly volatile over short-term periods, they tend to be quite smooth over long periods,” he said.
“Since 1900 for shares roughly two years out of 10 have had negative returns but there are no negative returns over rolling 20-year periods.”
He said investors, however, should be careful that any leveraged strategies that involve the risk of being forced to close positions after falls.
“[These strategies] are particularly risky during periods of volatility because you can be left without the ability to participate in the subsequent recovery in markets. So manage leveraged strategies carefully,” he warned.
Mr Oliver said investors will need to consider what is more important: “Complete avoidance of any fall in the value of your investment or achieving a decent and stable income flow?”
He said: “If it’s the former then bank deposits are the way to go. If it’s the latter then there are a number of alternatives to consider including corporate debt, commercial property, infrastructure and shares offering decent, sustainable dividends.”