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Market Volatility Tests Investors' Ability to Buy and Hold

Investors have not demonstrated an ability to buy and hold unhedged equities across recent full market cycles, as this chart shows.

The blue bars in Figure 1 illustrate the buying and selling patterns of investors, represented by trailing 12-month domestic equity mutual fund flows. Since 2000, the peak selling over the past two cycles occurred at market bottoms, and the selling continued after the financial crisis ended. Investors were largely absent from the post-crisis rally, which many believe was partly caused by the recent volatility triggering emotional reactions.

Investor Buying Selling Patterns Mutual Fund Flows

An actively managed solution, which enhances a portfolio’s diversification and potentially decreases exposure to market volatility, may help clients remain invested through full market cycles.

Separating the signals from the noise in the market is often the most difficult part of our job, and in periods of extreme volatility, getting caught up in the day-to-day moves can be a big distraction. I’ve found our team approach to be very beneficial in that regard. When things get uncomfortable in the moment, the communication among our team keeps everyone focused on the main goal—creating and preserving our clients’ wealth.

Markets can be volatile, and that volatility can test an investor’s ability to buy and hold. This is true of investing in established U.S. markets and it’s also true of investors in emerging markets. Investors who sell when they’re uncomfortable tend to have unfortunate timing—selling at a market’s bottom and missing when the markets rally.

Figure 2 tracks the growing investment, via mutual funds, in emerging markets since 1993. In February 1993, the first month Morningstar began reporting Diversified Emerging Markets category net flows, $39 million was in funds whose benchmark was the MSCI Emerging Markets Index.

The blue bars in Figure 2 illustrate the buying and selling patterns of investors, represented by the estimated net flows into what is now a $271 billion1 category. The green line illustrates the jagged ascent of the index. As can be seen at multiple times over the last 20-plus years, those who took part in peak selling at market bottoms were largely absent from rallies that followed.

For more, see the Calamos Sales Idea Volatility and the Need for Active Management.

Calamos Volatility Opportunity Guide
Investor Buying Selling Patterns Emerging Markets Flows

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Disclosure

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

Past performance is no guarantee of future results.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The S&P 500 Index is considered generally representative of the U.S. stock market. Indexes are unmanaged, do not entail fees or expenses and are not available for direct investment.

MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe, and Asia/Pacific region.

BofA ML All U.S. Convertibles Index (VXA0) is comprised of approximately 700 issues of only convertible bonds and preferreds of all qualities.

The Barclays U.S. Aggregate Bond Index covers the U.S.- te, taxable bond m denominated, investment-grade, fixed-ra arket of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

The MSCI EAFE Index is an arithmetic, market value-weighted average of the performance of securities listed on the stock exchanges of selected countries in Europe, the Far East and Australia.

The MSCI Emerging Markets Index represents large and mid cap companies in emerging markets countries.

The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*-- excluding the United States.

The HFRI Equity Hedge Index consists of funds where portfolio managers maintain long and short positions in primarily equity and derivative securities.

The Nasdaq Index is the market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.

The Russell 2000 Index measures U.S. small-cap stocks.

The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

Important Risk Information.An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s).There can be no assurance that the Fund(s) will achieve its investment objective

Investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. More detailed information regarding these risks can be found in the Fund’s prospectus.

Some of the risks associated with investing in alternatives may include hedging risk, derivative risk, short sale risk, interest rate risk, credit risk, liquidity risk, non-U.S. government obligation risk and portfolio selection risk. Alternative investments may not be suitable for all investors.

The principal risks of investing in the Fund(s) include:

Convertible Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, equity securities risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Dividend Growth Fund: declining equity values; losses from MLPs related to lack of portfolio diversification, changes in tax laws, lack of liquidity, declining equity values, and conflicts over control rights; incorrect selection or judgments on portfolio holdings by the investment advisor; increased transaction costs because of frequent turnover; losses from currency fluctuations; lack of liquidity or correlation to underlying securities in the options market; and potential illiquidity of securities purchased privately under Rule 144A.

Emerging Market Equity Fund: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, currency risk, geographic concentration risk, American depository receipts, mid-size company risk, small company risk, portfolio turnover risk and portfolio selection risk.

Evolving World Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, convertible securities risk and portfolio selection risk.

Global Equity Fund: equity securities risk, growth stock risk, value stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Global Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

Growth Fund: equity securities risk, growth stock risk, mid-sized company risk, foreign securities risk and portfolio selection risk.

Growth and Income Fund: convertible securities risk, synthetic convertible instruments risk, equity securities risk, growth stock risk, small and mid-sized company risk, interest rate risk, credit risk, high yield risk and portfolio selection risk.

High Income Fund: high yield risk, convertible securities risk, synthetic convertible instruments risk, interest rate risk, credit risk, liquidity risk and portfolio selection risk.

International Growth Fund: equity securities risk, growth stock risk, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk.

Market Neutral Income Fund: convertible securities risk, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk and portfolio selection risk.

Total Return Bond Fund: interest rate risk, credit risk, high yield risk, liquidity risk, mortgage-related and other asset-back securities risk, including extension risk and prepayment risk, U.S. Government security risk, foreign securities risk, non-U.S. Government obligation risk and portfolio selection risk.

Opportunistic Value Fund: equity securities risk, value stock risk, small and mid-sized company risk, foreign securities risk and portfolio selection risk.

Hedged Equity Income Fund: covered call writing, options, equity securities, correlation, mid-sized company, short sale, interest rate, credit, liquidity, portfolio selection, portfolio turnover, foreign securities, American depository receipts, and REITS.

Global Convertible Fund: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk.

Calamos Phineus Long/Short Fund: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.