Investment Strategies for Extreme Volatile Market

A volatile market can be defined as the tendency to rise or fall within a short period of time – in other words it is caused by the ups and downs of the individual investments within the market.

When it comes to volatility, the general advice is to keep calm! Volatility in the market is not necessarily a bad thing.

Volatility is one of the main reasons why investors sell at the wrong time and often fail to benefit from any potential recovery over the longer-term.  Whilst it can be a natural instinct to want to sell in times of uncertainty to avoid the risk of further loss, don’t forget that as the market falls this reduces the cost of additional purchases you may make. 

Here are five potential options: -

1. Accumulate Cash

A range bound market is not a time to panic sell. But it may be an ideal time to cut back, especially if you’re an index investor. True, the market may produce an average annual return of around 10%. It doesn’t happen every year, and there have been numerous years when the markets reversed.

2. High Dividend Stocks

One of the best places to take cover in a volatile stock market is in high dividend stocks. The dividends themselves provide something of a cushion. Even though the price of the underlying stock may fall, you’re still earning steady dividend income. But the income also helps to stabilize the price. After all, in a market where capital appreciation is less certain, income becomes more important. Investors are naturally drawn to the reliability of dividend income, which can serve to minimize stock price declines.

3. Re-balancing as per time horizon

Select investments based on the time-horizons of your goals, irrespective of which investment is doing well currently. Watch out for the effect of the run-up on the one-asset class on your portfolio. If the equity runs up the proportion of your total portfolio in this asset class will also inflate and make it riskier. Re-balance your portfolio periodically and make sure that it continues to reflect your preferences for risk and return.

4. Maintain discipline

Moving money across different asset classes is not a good idea. If it backfires then you might not be able to meet your goals? Quite often when we move around our money, we end up incurring a minor loss and we are not able to replenish it. And the invasion ends up affecting our long-term funds and we find ourselves at a stage where we can neither borrow money nor can fund our self through any other source of income. Therefore, the way to see it is that, keep it simple and maintain a consistent discipline towards your investment.

5. Be driven by your goals

Your savings and investment activity should always be driven by your goals. And mistakes on that front could derail your plan. But, if you know what to watch out for, then you can take precautions and avoid them as far as possible. Automating your investments and inculcating the practice of periodically monitoring and re-balancing your portfolio can go a long way. In conclusion, I will recommend that in volatile markets, if you are unsure about managing your portfolio then it is better to use the services of a financial ad visor. While there is a cost attached to it, in a long haul the benefits will far outweigh the costs.

Conclusion

The purpose of investigating ways to invest in a less stable market isn’t to advise making wholesale changes in your current portfolio. No matter what, the long-term favors a large investment in the general stock market. But at the same time, the stock market is subject to headwinds that can cause you to question your original strategy.

You don’t necessarily need to change that strategy, unless of course your portfolio is comprised 100% of stocks. Instead, you can just change your direction a bit and add allocations into other assets that will strengthen your portfolio for the long-term. And given that investing is a long-term activity, that only makes good sense.