The stock market today is associated with uncertainty. Market turbulence has already affected various sectors and stock trading is not an exception. In times of extreme volatility, most investors do not know what to do and how to manage their running assets. Sometimes, they make decisions on impulse, which leads to serious losses.
In this article, we will share 5 effective and practical tips that will help you protect your investment portfolio during extreme volatility. You will learn how to manage your assets when major markets are sliding.
The first thing investors should do is to stay calm. Volatility is a natural thing for any financial market. This is how it actually differs from investment risks. Yes, slides and declines can be unexpected and unnerving. However, they are 100% normal, especially when it comes to stock trading and long-term investment strategies.
Those, who have been involved in long-term trading strategies, have observed market spikes and declines from time to time. It happens periodically and some find it hard to cope with the situation and stick to the initial trading plan.
Whatever happens, here are the two crucial things you need to remember when a stock market is volatile:
Now, let’s get to practical tips that will help you keep portfolios protected. Of course, they will not guarantee 100% success, as market volatility can be very unpredictable, especially considering current geopolitical and economical situations. On the other hand, they will definitely provide a proper view one should take when managing assets in the long-term perspective.
The first thing investors should do is review their risk tolerance and risk capacity. In simpler words:
We will never stop saying that a diversified portfolio will protect you from disastrous losses. Investors should always have a clear understanding of how each asset class is doing. What’s more, it is vital that the asset blend matches your financial goals.
The more stable portfolio you create, the less harm stock market volatility will do to your capital. Cash equivalents or cash itself are the best defensive assets. Other options involve treasury securities, government bonds, and some other assets that will let you establish enough security and stability for operating assets.
Another tip here is to use less volatile assets in case you plan to spend money in the next few years. It will prevent you from selling assets in the down market losing not only profits but also savings. This is where short-term bonds might be a good idea.
Professional investors rebalance their portfolios from time to time or when needed. Stock market turbulence is the right time for this. When we say “rebalance”, we mean selling overweighting positions in relation to other instruments in your portfolio.
The idea is to move long-term overweight assets to an underweight position letting them gain value from the blank. You can create specific timeframes or intervals to keep your portfolio constantly rebalanced and refreshed.
Make sure your technique is adapted to fast-moving situations in the market. Every time you enter an order, every current condition must be taken into account. Keep an eye on the trading hours, as the first and last hours can be quite tricky considering changing closing and opening stock prices. Try early and after-hour trading strategies to find new ways of handling volatility.
When markets experience turbulence and extreme volatility, the key to success is to have a properly constructed and well-balanced portfolio. It is not just about risk management. It is about creating a blend of defensive assets with the target on specific securities with smoother investment potential in the medium or long-term perspective.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.