Six ways to handle market volatility
1. Lower portfolio volatilities through diversification
Diversifying your portfolio with assets of different attributes helps lower the overall volatility of your investments and balance performances. Diversification within the same asset class is possible too. They key is to understand the different risk attributes of different assets with regard to the industries and regions they belong to.
2. Create compounding effects with long-term investment
A lot of investors make frequent trades in the market with the principle of “buy low, sell high.” But the method often turns out to be counterproductive and results in increased transaction costs. A better suggested approach is to use the dollar cost averaging, meaning to enter the market in sequence and reinvest all stock dividends. The results? Effects of accrued compound interest.
3. Place emphasis on quality during market downturn
Amid market volatility, companies with robust financials can generally maintain cashflow and dividend payout, which helps stabilise their share prices. Same for bond issuers. Those with better credit quality have relatively low default risks even when operation conditions worsen.
4. Market fickleness is the norm – get used to it
US stock markets have tumbled over 10% from a 52-week high for 10 times in the last 20 years. Market correction is actually not fearful. On the contrary, it could make valuations more attractive and creates buying opportunities.
5. Stick to investment goals and don’t bite off more than you can chew
Don’t let short-term volatility disrupt your investment plans. Neither should you buy individual stocks just because their prices drop a lot. You should try to understand your risk appetite and financial conditions, avoid biting off more than you can chew.
6. Pay attention to disruptors in the markets
While dealing with market volatilities, always pay attention to market changes, especially long-term trends that could potentially disrupt the global economy. Only through active preparation for the next economic cycle can one seize opportunities unanticipated by others.
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