So far 2022 has been one of the most dramatic and emotional rollercoasters we have seen in many years. Summer tans from December beach holidays had hardly faded when the talk of rocketing US inflation and higher interest rates began unsettling markets. The last two weeks of January saw indices fall some 5% from their December highs, only for Russia’s attack on Ukraine in February to exacerbate these losses further.

At the time of writing, markets are broadly between -15% and -18% off December’s levels…

What are investors to do? The short answer – absolutely nothing!
Possibly the most difficult and challenging thing to do, because we are hard-wired to want to do something. But doing nothing at a time like this, staying invested, and ‘holding the line’ are the time-proven strategies that will result in your walking away from this bout of volatility versus being ‘carried out’.

I came across this graph showing the ever-onward march of markets dating back to 2009, and the many market-moving events that might have encouraged investors to sell-out at each.

Many of these events heralded losses of more than 20% at the time. Yet, following each and every shock is a resultant recovery and gains for those who remained invested.

Admittedly, volatility is not pleasant. In fact, it’s downright unbearable. But volatility is the price of admission for the stock market. Further, the necessary skills of unwavering self-control, pragmatically focusing on value and not price, and being comfortable standing alone and not running with the herd are so counter-intuitive. But these are the stand-out skills and features of successful investors.

To compound matters, these skills cannot be learnt from any textbook, financial journal, or from anyone else – we can only learn them from our own lived experiences. Think of it as ‘building character’. We just sometimes wish said character building was easier, and didn’t involve the pain and suffering that comes with it. But, then again, would we gain as much from the experience if it was a simpler, easier, or more pleasant experience?

At Octagon our strategy has always been a simple one: Focus on what we can control. While we cannot control the direction of markets, by managing asset allocation, risk-budgets, costs and positioning, we can control how our clients’ portfolios will react to these movements.

While managers inevitably all strive for the proverbial ‘holy grail’ portfolio (one that always captures the market’s gains but never incurs losses), we understand that this is the stuff of fantasy. But, if we are able to navigate through the volatility in as best a manner as possible, limiting losses to the greatest reasonable extent, while still keeping sufficient chips on the table to participate in the recovery when it comes, by and large we can deliver on the long-term mandates that we have been set.

Nobody can be sure when markets will resume their upward march, but we are confident that this will inevitably happen. We only want to be sure that no one is left behind when it does.

As always, I thank you for entrusting us with the management of your portfolios, and for having the ongoing faith in our decisions for all of these years. On behalf of the team, I assure you that we do not take this for granted!

Wishing you and your loved ones a safe, pleasant and peaceful long weekend ahead.

Steve Crouse
Chief Investment Officer and Senior Advisor