Junaid Raza Syed (Senior Editor/Department Manager FS)
There are times when stock market trends are very strong, attracting many investors to take advantage of strong bullish trends and refrain from bearish ones. And then there are times when sideways trend perplex many investors and push them into limbo of decision making since this intermediary period may be a precursor to a high or low trend.
Investors commonly deploy specific range of strategies to match these trends. However, there are times when stock markets are extremely volatile and the system of strategies for strong trends is no more applicable. To protect the hard-earned gains on your long-term investment in the times of high volatility, below are some ideas that can help.
First we need to understand the difference between risk and volatility. Volatility is related to the unexpected swings of stock prices in the market which happen in the most unwarranted fashion and happen more often than usual. Risk, on the other hand, is inherent in every investment and may not be reflective of the stock price because every investment has multiple interdependent risks at all times.
When prices are changing rapidly then the market is said to be volatile and your investment is at a greater risk. When volatility in the market increases, the risk increases.
During periods of volatility, there is a significant increase in number of trading transactions, causing many investors to withdraw their long term investments as a protective measure. However, the following strategies could provide better ideas for the periods of volatility and could keep you in the game even during volatile times.
Use Different Baskets
As old and clichéd as it may seem, but diversifying wisely is still one of the most prevalent strategies used by investors who are focused on gains in the longer term.
Just have a look at the list of subsidiaries and investment portfolio of Warren Buffet’s Berkshire Hathaway, a beacon to every long-term investor. It includes companies operating in banking, home appliance, electronics, financial, beverage and many other businesses.
While planning to diversify, you must consider investing in different industries to protect against global trade wars and international political climate. Consider the type of investment itself by investing some capital in Mutual Fund or Hedge Fund of excellent historical results to create stability.
Create a fund for investment in stocks that are currently available at significantly lower value considering their price to prospective earnings ratio, book value, sales, cash flows, dividend yield or any other ratio.
This will not pay-off immediately but will, over the longer term, be more profitable than many stocks with strong trends. Make funds available for companies growing at a fast rate to achieve high gains in the short term.
Consider Your Retirement Plan
If your retirement plan is not giving you many years to work, then your risk appetite should be low. This simply means that you should not participate in the whims and blows of a volatile market in the hopes of earning quick and big.
A volatile market is enticing for everyone but you must consider that any negative experience can push your retirement plan forward for an indefinite period of time. Keeping almost 4 years’ worth of your planned expenses after retirement in a secure fund is a good idea so that the gains on this investment can provide for your post-retirement living to a great extent.
Monitor Your Portfolio
Although the very idea of investing in stocks with long term benefit in sight is to create a passive source of income, but the frequency of revisiting your portfolio should be regular and responsive to market news. No plan is immortal, no matter how carefully it is devised.
Usually, an annual review of the plan is sufficient to balance out the changing risks. This annual review is best done after financial year-end but it can be done on calendar years or any other suitable date format as long as it is happening at least once a year.
Invest Over Time
You can invest over time by using the dollar cost average method in a protected stock. This will regularize and ensure that the size of your stable income is increasing and you still have room left to address other preferences in your investment plan.
A good example of this is to fix an amount to be invested in your 401K each month and keep the remaining in the pool for other investments. It curbs the temptations to gain from the exploits of volatile market.