In volatile markets, it is especially important to pay attention to your investment portfolio. When the market is volatile, it experiences significant ups and downs, which can be explained by market pressure, changes in value and psychological impact on investors. Volatility means stocks or funds make unexpected changes based on long-term investment trends. Investing in such conditions is becoming more difficult.
Time in the market is a complex factor, so it is better to leave it to professional investors. Below is the advice of expert Ram Lee, a partner at Seven Bridges Advisors, for investors who want to survive and prosper in an unstable environment.
What is volatility?
Volatility is a measure of how much stocks or securities can rise or fall in price compared to their long-term base level. As a statistical method, standard deviation is used. For example, if the standard deviation is about 15 percent, this means that the price may rise or fall by about 15 percent, while remaining within the expected movements. Other types of investments, such as certificates of deposit, remain stable with standard deviations from zero.
The causes of volatility are not always known. Sometimes news from companies, other markets, day traders, and institutional investors can cause these prices to fluctuate greatly. Psychological factors can also cause volatility. This is understandable because the buying and selling process is an emotional business. It is best to keep emotions out of stock and investment trading, even when markets are volatile. Work based on statistical principles and you will find that you are getting the best return on your investment.
How to invest in volatile conditions?
Some investors prefer to ignore volatility for a long time. This can cause a significant financial blow if the market experiences a recession. Although it is likely that the stock market will recover after some time, this is a strong psychological blow to investor confidence. Some investors who use this strategy ignore their investments until they are ready to cash them out, while others make small changes based on market movements.
There is a common misconception that a 10-year buying and holding strategy will always be profitable. The starting and ending points of any ten-year period can be good for bad stock markets. Although most ten-year periods have a positive return, this does not always happen.
Tips for volatile markets
When markets move, opportunities often arise. Typically, most investors should strive to balance their portfolios when the percentage distribution gets out of hand.
For example, if you plan to have a portfolio that is 70% in stocks and 30% in bonds, and your investment in stocks is growing compared to your investment in bonds, so that your portfolio now comprises 80% of stocks and 20% of bonds, then, probably it's time to cut your stock portfolio a bit. In this case, a disciplined investor can sell the shares in order to bring his portfolio in line with the ratio of 70% / 30%. On the contrary, if stocks fall and the same portfolio goes from 70% to 60%, it is probably time to sell some bonds and reinvest in stocks after such a sale.
How to act in a volatile market?
It is wise to place a limit order in a volatile market, whether for a single stock or an exchange fund, which is a more diversified stock pool. Limit orders may be a little more expensive than market orders, depending on your broker, but they give you more confidence in what price you will buy or sell. With a limit order, the broker will automatically buy or sell your shares for a given quantity and only when the price reaches or exceeds a certain threshold.
Stop orders can also be useful to make sure you sell the stock you want if its price starts to fall. Although stop orders can limit losses, they should be used on stocks that you are willing to sell if the price falls, rather than buying more.
Both limit and stop orders will help you manage a volatile market without becoming attached to the screen to keep track of your investments all the time.
Survival in a volatile market
Wide fluctuations in prices can scare even the most experienced investor. Using these tips, investors should be able to avoid the worst effects of market movements and should be able to make money. First of all, investors should continue to monitor even their long-term investments in a volatile market.