What Goldilocks can teach investors about volatility

The challenge, of course, is that markets almost never provide such certainty. Be it stubborn inflation, slowing economic growth, lofty valuations or rising geopolitical tensions, there’s always something to worry about.

This can be difficult to accept, particularly for newer investors. Most begin their investing journey assuming that successful investing is all about identifying the right assets and then the right moment to act.

But the longer investors spend in markets, the more they realise that clarity is visible only in hindsight. Looking forward, every period whether it’s the Global Financial Crisis, the COVID-19 pandemic or the AI revolution, feels uncertain in its own way. Even some of the strongest bull markets in history were accompanied by convincing reasons to remain cautious. Yet investors continue to search for reassurance before they commit.

The irony is that some of the best long-term investment opportunities have emerged during periods when uncertainty felt highest. Understanding why investors struggle with that idea, and how volatility influences decision-making, may be more important than understanding volatility itself.

Source: VanEck, for illustrative and educational purposes only.

Volatility has an interesting effect on investors. It rarely changes their long-term objectives, but it often changes how they feel about the short term.

A retirement goal that seemed entirely achievable six months ago can suddenly feel ambitious. A diversified portfolio that appeared sensible begins to look exposed. Investors start searching for explanations, forecasts and signals that might restore a sense of control. Yet the underlying facts are often less different than they appear. What has changed is not necessarily the destination, but investors' confidence in the journey.

Investors have become so fascinated by volatility that Wall Street created an entire index devoted to measuring it. The VIX, which itself is a measure of volatility based on S&P 500 index options, is often referred to as the market's fear gauge because it tends to rise when investors become nervous about what comes next. History suggests that periods of peak anxiety have not always been poor times to invest. In fact, some of the strongest subsequent returns have followed periods when uncertainty felt greatest.

Source: Bloomberg. Past performance is not indicative of future performance. You cannot invest directly in an index.

That does not mean every market decline will (or should) be welcomed. It does, however, serve as a useful reminder that fear and opportunity have a habit of appearing together.

What the best investors do differently

Investors cannot control inflation, interest rates or the next market correction. What they can control is how they respond to them.

Over time, some habits tend to prove more useful than others:

The first is to spend less time predicting and more time preparing. Investors often assume successful investing is about correctly forecasting what happens next. In reality, markets have a habit of surprising even the most experienced forecasters. Rather than building a portfolio around a single view of the future, many investors are better served by building one that can withstand several different futures. Preparation is rarely as exciting as prediction, but it is often far more useful.

This is one reason many investors use ETFs like VanEck Australian Equal Weight ETF (ASX: MVW) as an anchor, allowing them to participate across different market environments rather than relying on a single economic scenario playing out.

The same principle applies beyond broad market exposure. Investors frequently debate whether quality, value or growth will outperform next. Yet this assumes the future can be predicted with a degree of precision that markets rarely allow. Rather than relying on a single style prevailing, some investors spread their exposure across different factors.

The second is to remember that market movements and personal goals operate on very different timelines. Retirement plans, education savings and long-term wealth creation are measured in years and decades. Market sentiment can change in an afternoon. Investors often get into trouble when they begin evaluating long-term plans through the lens of short-term market movements rather than the other way around.

The third is to be sceptical of the urge to act. Activity and progress are not the same thing. Selling, buying, reallocating and reacting may provide a temporary sense of control, but some of the most successful investors have distinguished themselves not by the decisions they made, but by the decisions they resisted making.

The search for certainty

Goldilocks spent her entire story searching for certainty disguised as comfort. Investors are often tempted to do the same. The trouble is that certainty rarely arrives in time to be useful. By the time the outlook feels clear, much of the opportunity has often already passed.

None of the tips we shared above will eliminate volatility or uncertainty, but they can make both easier to live with.

Key risks

An investment in our Australian equal weight ETF carries risks associated with: financial markets generally, individual company management, industry sectors, fund operations and tracking an index. See the VanEck Australian Equal Weight ETF PDS and TMD for more details.  

MVW is likely to be appropriate for a consumer who is seeking capital growth and a regular income distribution, is intending to use the product as a core, minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a high risk/return profile.