Invest in a volatile environment


The volatility that we have recently experienced in the market is very worrying for some investors. Unfortunately, investors who hit the panic button and sell themselves only recognize the large losses in their portfolios to turn to investments that are seen as safer places to invest.

The point is, we invest our money for long-term rates of return that will exceed the rate of inflation and help us preserve our purchasing power. Historically, cash has been the worst place to invest for the long term.

Losing investment capital in a volatile market

According to Fidelity Investments, investors who sold their 401 (k) holdings as the market collapsed between October 2017 and March 2018, and then stood on the sidelines, saw the value of their accounts increase by only about 2%, including contributions, until June. of 2019. This compares to those who held on and saw account balances rebound by about 50%. During times of extreme volatility, wealth managers will often tell clients to stay invested rather than sell and lock in large losses in a failing market.

Building confidence in your strategy is one way to avoid making the mistake of buying high and selling low. Having the mental conviction to tell yourself that you have a carefully planned portfolio of high quality investments goes a long way to weathering the toughest days of market volatility. If you are unsure of how to select high quality investments, consult a financial manager or registered investment advisor.

The question is; how to achieve this state of mind? It’s not easy if you’re the type of person who tends to get knots in your stomach when the market goes down. We outline a few steps below that can increase your confidence level.

Overcome the fear of volatility

One of the steps you need to take to better manage volatility is to make sure that you have sufficient cash reserves for any financial emergency that might arise. This way, you don’t depend on your portfolio for unforeseen expenses and your anxiety level will be lower knowing that you don’t need to sell your investments when they have lost value.

Make sure you have an investment mix that fits your risk tolerance and time frame. This can be accomplished by considering how you felt when past market declines occurred. Your asset management The advisor should be able to provide you with a questionnaire that will give you a score when completed. The score on the quiz will have a corresponding asset allocation that you can use to determine your allocation between stocks, bonds, and cash.

Once you’ve determined your allowance, stick to it. It is recommended that you reallocate your assets regularly in order to keep your level of risk at the same level. This means that a portion of those investments with a better performance will be sold (high sell) to buy in order to buy stocks in those that did not perform as well (low buy).

Other ways to hedge volatility can be through the use of options. Two simple strategies can be applied. One is the writing of covered calls against underlying stocks or ETF positions. In this strategy, you (the option seller) collect money from a speculator (the option buyer) in exchange for an agreement to sell your shares only if they reach a specified price. (higher than where they are traded at the time of the transaction). transaction). The option must reach the target price (strike price) within a predetermined time frame (expiration date). If not, the contract expires, you keep the money paid and are free to sell more options on that equity position.

The other strategy is to simply buy a put option. This gives you the right to sell your position in any stock or ETF you own at a predetermined price within a predetermined time frame. For this lien, you will pay money (a premium) to the potential buyer (put option seller) of your stock. This strategy should be implemented in times of low volatility, as the cost of trading will increase when the markets start to fall.

Buy with conviction

Let’s say you own a stock that has worked well over time. The stock has had a history of increasing income, profits, and increasing dividends. It seems that the stock generally rises when the market rises, it is only now that there has been a massive sell off in the market, and the stock has fallen dramatically due to market conditions. Maybe it’s time to do some homework on the business and make sure the downside is simply due to a generally bad market. If this turns out to be the case, it may be time to buy more stocks. Large companies are often put up for sale when the market goes down, only to see a dramatic recovery after the market downturn is over.

Speak with your wealth management team

You should also consult your Financial manager when markets are volatile. Investment professionals seek to understand what causes market volatility and can often provide information. Often times, your investment professional can help ease your anxiety and remind you of your commitment to your allowance and financial goals.

Source by Wendy Peterson

Comments are closed.