“History may not repeat itself, but it does rhyme.” – Mark Twain
In 2015, in the midst of the commodity price downturn, we ran a series of webinars based on the premise that “volatility equals opportunity.” The idea was that volatile markets can present attractive investing opportunities for those with the patience to look past short-term sell-offs and buy when others may be selling.
Why do investors buy high and sell low?
With the benefit of hindsight, it is apparent that the market dislocation of 2015 created an attractive entry point for those with the discipline and experience to take advantage of the opportunity. The ability to opportunistically buy and hold assets through complete market cycles can contribute to meaningful portfolio appreciation.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
This contrasts with the experience of many open-end mutual funds and hedge funds that faced significant investor redemptions over the same period. During market shifts like those seen in 2015 and early 2016, investors tend to sell indiscriminately out of fear of the unknown rather than focusing on underlying fundamentals.
In my experience, investment decisions based on day-to-day price movements often lead to missed opportunities. As markets tend to overshoot, both on the way up and on the way down, investors should guard against focusing too much on short-term market impulses at the expense of long-term investment horizons. Simply put, investors that sold at the depths of the 2015 downturn ran the risk of buying high and selling low.
Of course, investing can be an emotional business. Many of today’s investment goals, such as saving for college or putting money away for retirement, are quite personal in nature. So, demanding that investors remain calm, cool and collected during periods of severe market volatility is unrealistic. The key, then, is to reduce the ability to react emotionally.
How illiquidity can help
Especially during times of market volatility or uncertainty, it may benefit investors to embrace illiquidity for a portion of their portfolio. Since we all have different personal and financial goals, the ideal amount of illiquid investments will depend on an investor’s investment objectives, risk tolerance and liquidity needs. Embracing illiquidity can be especially beneficial when investing in assets that are not readily tradable, such as private debt and private equity, which are meant to be held for the long-term. We believe that investors are best served by fund structures that seek to match the liquidity of their underlying investments.
Like in life, patience truly can be a virtue for investors. It is a simple concept, but the wisdom of this maxim has been proven many times over. As the experience of living through the credit market’s many ups and downs during the past three decades reminds us, history may not repeat itself, but it does rhyme.
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.
Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.
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By Michael Forman, CEO, FS Investments – Originally published on fsinvestments.com