Volatility: What It Is And How To Handle It
Learn how to handle the impact of market volatility on your investments
Market volatility can be a menace or an opportunity, depending on how you look at it. If your stock prices are suddenly heading downwards, you’ll experience a real temptation to cut your losses, cash out early and lock yourself in a bunker away from the markets. Here we present some strategies to deal with market volatility.
If a stock is highly volatile, it means that its value tends to fluctuate quite heavily, meaning that you may never be sure what exactly the future holds for that particular investment. Naturally, the more volatile a stock, the more risky it is – with the rewards being potentially very high, or disappointingly low. Lower volatility stocks change less often and more gradually, and as a result tend to generate lower but more consistent returns.
Panic-selling your holdings
This is always going to be tempting, especially if you’re seeing value disappear in front of your eyes. Before you do this, try thinking back to the reasons why you invested in the stock in the first place. Has anything fundamentally changed about that? Do you think there’s still a bright future for that product? Are the markets over-reacting to something? If you sell without considering these points, you may simply lock in your losses.
By investing regularly, for example through Pound-Cost Averaging, you will have the potential to ride out market volatility and provide potential for more gains over time.
“Know what you own, and know why you own it.”
– Peter Lynch, American investor & mutual fund manager
Reducing portfolio volatility
You probably don’t want your entire investment portfolio to be made up of highly volatile and risky stocks – your heart wouldn’t appreciate being put through the trouble!
You can adjust the volatility of your portfolio by investing more in bonds. Bonds are generally considered to be safer than stocks, and their performance does not tend to follow that of equities.
By adding investments from different sectors, or simply companies that you think are a safe pair of hands, you can also diversify which stocks you are exposed to. This will hopefully mean that if one set of stocks go down, the other set doesn’t necessarily have to follow.
You can also invest in different countries and thereby engage in global diversification. Through these strategies, you’ll hopefully have a more stable and balanced portfolio that can absorb short-term volatility in any particular stock.
Timing the market = bad idea
If you’re thinking to try and guess which way the market is heading before buying or selling one stock just to try and make a quick buck, then you’ll be setting yourself up for a whole lot of trouble.
Studies show that investors who try to time the market lose money compared to those who just buy and hold diversified portfolios.
“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham, legendary investor and mentor to Warren Buffett
Keep calm with Wombat
Follow our investment tips across the Learning Hub and you’ll be best prepared for the investing challenges you might face. It’s important to note that all investing carries risk, and that you can also lose money in your investments. But we believe that if you follow a broad set of key principles, you’ll be able to manage these risks and give yourself the best opportunity to end up on top in the long run.
You can start investing with as little as £10 on Wombat. Buy single stocks or Exchange-Traded Funds (ETFs) to give yourself exposure to the companies and brands you love. Capital at risk.
