How to control market volatility in turbulent times?

How to control market volatility in turbulent times?

June 8, 2021

Many investors, especially in the Binary and Forex market, get started through periods of high volatility in turbulent times and continue to doubt their investing plans. Similarly, this is true for new entrants, who might be tempted to exit the market entirely and sit back until it appears safe to return. It’s important to remember […]

Many investors, especially in the Binary and Forex market, get started through periods of high volatility in turbulent times and continue to doubt their investing plans. Similarly, this is true for new entrants, who might be tempted to exit the market entirely and sit back until it appears safe to return. It’s important to remember that market volatility is unavoidable and does not occur in a pre-determined time. Therefore, the best way to deal with such an investment phenomenon is to use some practical strategies to control it. Before explaining these strategies, we need to know what market volatility, mainly, is.

Market volatility is the fluctuation rate of the market’s average value. This price fluctuation often occurs dramatically in a short-term period. The price of shares will change rapidly in a short-term period if market volatility is high. These changes can be interpreted as loss or gain. On the other hand, low market volatility means that significant price fluctuations may be less likely to occur and that market is more willing to stay relatively steady over time.

 

A. Long-Term Strategies

1. Diversify your portfolio

Over time, a well-diversified fund with a diverse combination of equities, shares, and cash would certainly be less risky than a portfolio of just a few assets. Profits in other sectors, therefore, replace losses in one sector of a well-diversified portfolio. Bonds and stocks, for example, usually move in entirely different directions. But, on the other hand, in a focused equity-only portfolio, all profits and losses will have a more significant effect. So diversification is indeed one of the keys to controlling the amount of volatility in your investments.

2. Look for low-correlation investment

Market volatility associated with a single asset class, such as bonds, can be mitigated by allocating a portion of overall portfolio resources to other forms of investments that have traditionally responded differently to market and economic events. This relationship is referred to as “correlation,” which evaluates the likelihood of two investments moving in lockstep. So, invest in assets that have the most negligible correlation. So if, for example, one asset has a downside (loss), this downtrend has a minor impact on the potential profitability of the other.

3. wait it out

If you’ve discussed your long-term financial targets with your investment manager and devised a sound investment policy, the safest strategy might be to ride out any short-term volatility. Enable your long-term approach to work for you. Even though previous success is no indicator of potential returns, the stock market’s performance has historically trended higher over time, notwithstanding volatility.

4. Dividend-paying stocks

Dividends can give you lots of reasonably consistent returns, independent of stock price volatility. Volatility does not impact well on a corporation to stop paying dividends, mainly if it has been well-established. So, this case will affect stock markets and shareholder trust. As a result, firms seldom pay dividends unless they have been working for a long time and are confident in their ability to manage market volatility.

B. Short-Term Strategies

1. Plan strategic shifts among asset groups

While sticking to your long-term strategy is the better option, seeing your portfolio lose value can be stressful. If you’re worried that a stock market downtrend could last months or years, one surprisingly straightforward short-term solution is to raise the percentage of your portfolio in cash. This solution limits your chances of making a profit as well as the chances of losing it, so think twice before making such a decision. Moving from stocks to cash does require you to forecast market behavior, and the outcome can be determined by how accurate your forecasts are.

2. Consider small positions

Based on your goals, you can decide whether to choose a long or short-term investment. If you intend to make short-term deals to finance short-term targets or for other purposes, you can allocate approximately 10% to 25% of your portfolio. Try making smaller movements in a volatile market when making short-term moves. Lowering the scale of your deals will help you reduce your losses while also limiting your future profits. Of course, short-term movements won’t necessarily be enough to cover short-term targets if markets continue their downtrends.

3. Use market limiting and hedging strategies

Short-term traders use a variety of volatility-management tactics, such as cap and stop limit, alternative investment, option, and put. Each strategy has its own set of advantages and disadvantages. If you like to take them into account, talk to your financial planner first to know about their potential effect on your investment.

 

4. DCA

Dollar-Cost Averaging (DCA) is another method to reduce the effect of volatility on your investment. This technique entails trading a pre-determined value regularly, such as once a month, regardless of market trends. There’s no need to be concerned about whether prices are going up or down because this mechanical cycle is devoid of emotion. As a result, you will naturally experience gains and losses during a short-term period.

 

During periods of market volatility, such as the current global pandemic conditions, look back and remember what phase of investor psychology you are dealing with. Of course, market uncertainty or volatility is expected, but talking to a financial planner about your options, and implementing innovative strategies to control them, will help you make the best decisions possible.

 

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