Top 3 Strategies for Navigating Market Volatility
This is a writing sample from Scripted writer Melissa Orozco
Market volatility is an unavoidable concept in the world of investing. One day, the market is performing well, and the next, prices fall so low that you start to question if the investor lifestyle is really worth it.
But before you start making any rash decisions, you must understand that market volatility is what makes investing what it is. It’s how the market works and differentiates between seasoned and amateur investors. Besides, we can’t all become winners—some will lose, and some will gain.
The good news, though, is that while you might have zero control over market volatility, there are strategies you can adopt to ensure you don’t lose your investments.
What is Market Volatility?
Before we get into the strategies for building a resilient investment portfolio, let’s first define the term “market volatility.”
Market volatility refers to the rate at which the trading prices of a financial instrument, such as stocks and bonds, change or fluctuate over time.
From this definition, we can derive that if a financial instrument’s price fluctuates frequently in a certain period, such as monthly, then it has high volatility. On the other hand, if the price of a financial instrument remains steady, then it has low volatility.
Strategies for Navigating Market Volatility
In a highly unpredictable market, having a resilient investment portfolio that is still profitable is essential, lest you end up a loser. To do so, you must incorporate several strategies, including:
Diversify Your Portfolio
This is the number one, most efficient way to ensure your portfolio can weather through high volatility periods. Diversifying your portfolio means having a mix of different asset classes with the aim of creating a buffer against market volatility. It simply means following the popular saying that goes, “Don’t put all your eggs in one basket.”
To do this, it’s recommended that your portfolio have assets within and among the different classes. For instance, to diversify your stocks portfolio, you should own several multiple stocks from different sized companies (small and large), sectors, and geographical locations (local and international).
Rebalance Your Portfolio Regularly
With constant shifts in the market due to factors such as political and economic factors, your investment portfolio may not hold steady and give you the security you need. Rebalancing your portfolio can help deal with this issue—it involves reviewing your portfolio allocations regularly to ensure it gives you a fair balance of return and growth.
There are several ways you can rebalance your portfolio, but two of the most common approaches you can use are:
- Redirecting money to asset classes that aren’t performing as you’d expected until they return to their original allocation.
- Selling assets that are outperforming others and reinvesting the money in lagging ones.
So, how often should you rebalance your portfolio? While there isn’t a hard-and-fast rule for how regularly you should rebalance your portfolio, you can set regular intervals, such as quarterly or annually, instead of abruptly.
Understand Your Risk Tolerance
Your risk tolerance refers to the amount of losses you’re willing to bear when making investment decisions. Ask yourself, “How much money can I lose and still stick to my investment strategy without losing sleep?” This question doesn’t scratch the surface of efficiently describing your risk tolerance, but it’s a good place to start. To answer this question, you should consider several factors, such as:
- Age: How much time do you have until you retire? If you’re closer to retirement, you may be better off investing in less risky assets.
- Financial Situation: Are you financially stable based on your current income, savings, debt, and expenses? This is an important consideration because a stable financial situation can act as a buffer when the market experiences high volatility.
- Emotional Responses: Do market fluctuations make you anxious, or can you keep your emotions in check even when stock prices plummet? This factor is extremely crucial because it can prevent one of the most common reactions—panic selling—which can lead to big losses in the long term.
Conclusion
At the end of the day, market volatility is inevitable and, most importantly, unpredictable. Nonetheless, this shouldn’t be an excuse for investing haphazardly and hoping for the best. If you put in the work to research and adopt some of the strategies discussed in this article, you can efficiently mitigate the risks involved in high-volatility scenarios.
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