Market volatility isn't a matter of "if" but "when." Proactive investors and traders have strategies in place to beat volatility. Do you? In this article, we will look at some of the easy ways to mitigate volatility and optimise your portfolio.
1. Diversification: One of the best ways to manage risks in your portfolio, especially during volatile times is by investing across different asset classes, sectors, and geographies. This will help reduce risks associated with any single asset class.
The performance of different assets is not directly correlated as it is not impacted in the same way by news and any economic development. For instance, equity markets tend to correct during geopolitical tensions. However, in the same period, gold prices tend to rally.
2. Regular Monitoring: Regular i.e. timely monitoring of your investments is absolutely essential to protect oneself from market volatility. By monitoring market, one may spot undervalued assets or buy quality companies available at attractive prices, or spot new market sectors worth exploring. Also, consistently tracking market conditions, news, relevant economic data, and the performance of your holdings can help identify potential risks that might significantly impact your portfolio. This lets you pre-emptively hedge portfolio as and when required.
3. Risk Management: Market volatility makes it important to carry out proactive risk management. Tools like stop-loss orders and hedging strategies play a crucial role in protecting your portfolio. Stop-loss orders automatically sell securities when prices fall below a predetermined level, limiting potential losses. Hedging involves creating a buffer against negative market movements. By utilizing these tools, you can reduce the impact of volatility on the portfolio and potentially protect capital during market downturns.
4. Stay Informed: Proactive investors understand the value of staying ahead of the curve. Keep up with financial news, market trends, and economic data to stay informed. Understanding the macroeconomic environment – factors like inflation, interest rates, and economic growth – can help one make better investment decisions, mitigating risk while identifying potential opportunities amidst market volatility.
5. Have a Long-Term Perspective: While short-term volatility can be concerning, it is important to stay focused on your investment goals. Historical trends show that market generally recovers over time. By avoiding impulsive selling during volatile periods, you can get rewarded by staying on course toward achieving your long-term financial goals.
6. Maintain Liquidity: During volatile markets, maintaining liquidity is essential. Holding cash in your portfolio or assets that can be easily liquidated gives flexibility to invest in undervalued stocks and gives you peace of mind.
7. Review and Rebalance: Market volatility can shift your asset allocation away from your original asset allocation mix that was based on your risk tolerance and goals. For example, if the equity portion of your portfolio increases beyond your pre-determined allocation levels, then it is time to book profits and allocate the same in other asset classes. Such an approach will help in overall downside protection of the portfolio as the market turns volatile.
8. Avoid Emotional Decisions: Market volatility can trigger strong emotions like fear and greed, leading to impulsive choices that can adversely impact your long-term plans. In this scenario, it is important to stay disciplined and avoid making decisions based on emotions. Stick to your well-defined investment strategy and keep your eyes focused on your goals.
9. Consult a Financial Advisor: If you are unsure about the investment strategy which works well for you, consider the services of a financial advisor. A financial advisor will help draft an investment strategy that works for you after considering your goals, time horizon and risk tolerance. They can provide personalized guidance on how to navigate market volatility, rebalance your portfolio to match your goals and identify potential opportunities within the changing market landscape.
10. Stay Patient and Consistent: Market volatility has the potential to get the worst out of us. This is true even for experienced investors. Being patient especially during volatile times is an essential virtue which will help you stay consistent with your investment plan and help achieve your financial goals in a systematic and disciplined manner.
With these 10 steps an investor can be rest assured that despite market volatility, one will be able to safeguard portfolio from wild swings.
