Posted on June 18, 2019
Market swings are unsettling. Investors panic every time the stock market takes a nosedive. In fact, in times of severe volatility, many investors bail out of the market altogether. Here's a useful guide for investors on navigating a market when the water gets choppy.
What is Volatility?
Definition:
Volatility is a trait of a market or a security (stock) to rise or fall sharply within a short period, often unpredictably so.
Volatility is measured by calculating the standard deviation of a stock's annualised returns over a given period. It indicates the pricing behaviour of the security (stock) and helps estimate the fluctuations that may happen in a short period.
If the prices of a security fluctuate rapidly in a short period, it is categorised as having high volatility. If the prices of security waver slowly in a more extended period, it is categorised as having low volatility.
So, how should an investor react when things look unpredictable in the stock market?
Should an investor sell their stocks during periods of high volatility, or should they stay the course, and keep their money invested for the long haul? Everyone’s financial situation is different. What may be a piece of beneficial advice for a 21-year-old investor may not be the best course of action for a 35-year-old investor. While some investors can afford to take a little risk in their portfolio, others can’t. Moreover, while some investors may be able to figure the best plan of action for themselves, other investors may require a professional financial advisor to assist them in such situations.
Here are four basic things every investor should keep in mind:
1) Diversification
The expression, "don't put all your eggs in one basket" holds true for investment portfolios. If investors restrict themselves to investing in one category, it becomes difficult to absorb all the damage when that category takes a hit. However, if the investments are spread out over various investment categories, then a big hit in one category might incur only little damage to investors and their portfolio. For this very reason, many investors divide their holdings among stocks, bonds, and other types of investments.
2) Asset Allocation
Asset allocation depends primarily on two things –an investor’s age, and his appetite/accommodation for risk. Usually, older investors go for less risk while creating their portfolio as a loss would be harder to make up over time. With growing age, investors prefer bond holdings in their portfolio, because bonds are considered less risky than stocks.
On the other hand, younger investors who may be willing to take on more risk have a greater percentage of stocks than bonds in their portfolios in the hope of more significant gains over time.
Investors must allocate their assets carefully to reduce the damage caused by market volatility.
3) Stay Invested and Focussed on Long Term Plan
It is recommended for investors to stick to their long-term plan - especially if an investor has a couple of years left until fulfilment. When an investor has a solid investment plan, it is likely to be fruitful over a period, irrespective of how jagged and volatile markets might be for a while. The value of stocks tends to smooth out over a period.
Long-term investors should not let today’s fear prevent them from reaching their ultimate investing and financial goals.
4) Look for Opportunities
During times of stock market volatility, the stocks are available at a considerably lower price. Investors can use this opportunity to enhance their income portfolio. Investors who are beginning their investment journey can benefit by investing in index investments that have a little less risk than some other individual investments.
Advanced investors can look for more strategic investment opportunities as well. During market volatility, it might be a great time to buy precious metals like silver and gold before they skyrocket. Investors might also find attractive opportunities in currencies. When the real estate market is doing poorly, the investors might discover opportunities to buy a low-cost property.
Conclusion
In times of market and economic uncertainty, dwelling on how unpredictable and absurd everything is, investors can be on the lookout for growth opportunities.
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