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ADV INVST: Advisor Insights Market volatility underscores need for investment discipline and active management

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To say that markets have been quiet over the last few years would be an understatement. Until recently, volatility has been virtually non-existent, with the CBOE Volatility Index (VIX) hitting record lows and stocks moving only higher. Now, though, it seems the good times have finally come to an end.

In February, the VIX – the main measure of market volatility – hit its highest level since 2015, and it's been experiencing big swings ever since. With ongoing concerns around North Korea, seemingly weekly changes to U.S. government personnel and fears of a trade war, the turmoil is widely expected to continue hanging over the market.

"We live in a time of global uncertainty brought on by issues surrounding NAFTA, Trump policies, Brexit, late business cycles and monetary tightening," says Andrew Wells, Vice-chairman at Fidelity Investments Canada. "We've also seen the weakening of the U.S. dollar, possibly caused by Trump's isolationistic approach to trade policies."

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For investors, especially ones who have gotten used to markets mostly moving higher, volatility may be causing some panicked feelings. Fortunately, there are ways to deal with the ups and downs without getting queasy.

Eye on the long term

People must stay focused on their investment objectives, says Mr. Wells. Markets are likely going to keep bouncing around, in part because stocks have become more expensive. A negative move in the market tends to have a larger impact on stocks when valuations are high.

Add to that concerns around how earnings – which have been strong – will perform if trade issues between America and other countries heat up, and we could see volatility rise even further, he says.

In times like these, investors must stay the course, not panic, and resist making investment decisions underpinned by emotions.

"It's enormously important to remember we're long-term investors," says Mr. Wells, adding that in the grand scheme of things, volatility is still relatively low. "Look at the five-year chart and volatility is actually very little compared to what it seems like on a day-to-day basis."

Consider new opportunities

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If anything, the swings we've seen this year present an opportunity to get into a market that has run up in price. While investors shouldn't time the market, buying on a dip is an accepted investment practice, says Mr. Wells.

However, buying during a drop – and ensuring you don't panic-sell when the market falls further – requires investors to develop a strategy built around investing objectives.

"Most people are either saving for retirement, saving to buy a home or saving for their children's education. All saving has a purpose," says Mr. Wells. "It's important that we don't lose sight of that goal."

Unless investors and their financial advisors determine it's time to fundamentally change their overall strategy, they need to sit through periods of market turbulence and believe in the long-term growth story, he says.

Consider active management

While exchange-traded funds have done well over the last several years, most of these securities haven't experienced a down cycle. And when the market does drop, these securities will fall with them. Active managers, though, have a number of ways to protect a fund on the downside, ensuring investors don't lose as much as the market.

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For instance, Fidelity funds are always well diversified (even more sector-focused funds own varied stocks within a particular industry), their managers look for opportunities when markets fall, and some may move into more risk-protecting securities, like defensive large-cap names, or even into cash.

The company's active managers also look for potentially uncorrelated opportunities that can't be found elsewhere. Some of its funds, for instance, invest in private companies, including in early-stage operations.

"Finding value is a big job of the investment management industry," says Mr. Wells. "That involves providing unique insight and access to things investors can't ordinarily get."

"We have to constantly be developing, engaging and understanding what the next big thing is and how we would bring it to our clients," he adds.

Some active managers also play an important role in helping investors sift through industry trends and macroeconomic factors. While most of Fidelity's managers are bottom-up stock pickers, meaning they look at company fundamentals first, they can also explain "the risk categories and the mix of each of the investment vehicles, and make sure they're aligned with client objectives," says Mr. Wells.

"We work hard with our clients – investment advisors and institutional partners – to give them all that information so they can construct the best portfolio for their individual needs," he says. "It's important for investors to have the right mix of funds depending upon their particular liability or need. It's that mix that will help them get through more volatile times."

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