The volatility we have recently experienced in the market is very worrying for some investors. Unfortunately, those investors who hit the panic button and sold out are acknowledging huge losses in their portfolios only to turn to investments that are perceived as safer places to invest.
The fact is that we invest our money to earn 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 crashed between October 2017 and March 2018, and then sat on the sidelines, have only seen the value of their accounts increase by about 2%, including contributions. through June 2019. This compares with those who stuck it out and saw account balances bounce back by around 50%. During periods of extreme volatility, wealth managers will often tell clients to stay invested rather than sell periods and lock in big losses in a swing 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 in getting you through the toughest days of market volatility. If you’re not sure how to select high-quality investments, consult a registered financial manager or investment advisor.
The question is; How do you get into that state of mind? It’s not easy if you’re the type of person who tends to get a knot in the stomach when the market falls. Here are some steps that could increase your confidence level.
Overcoming the Fear of Volatility
One step you need to take to better manage volatility is to make sure you have adequate cash reserves for a financial emergency that may arise. In this way you will not be depending on your portfolio for unforeseen expenses and your level of anxiety will be lower, knowing that you do not 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 achieved by considering how you have felt when market crashes have occurred in the past. Their Wealth Management The assessor should be able to provide you with a thought-provoking questionnaire that gives you a score when you complete it. The score on the quiz will have a corresponding asset allocation that you can use to determine the split you will have between stocks, bonds, and cash.
Once your allocation has been determined, stick with it. It is good practice to reallocate your assets periodically to maintain the same level of risk. This means that a portion of those investments that perform better will be sold (sell high) to buy in order to buy shares in those that have not performed as well (buy low).
Other ways to hedge volatility can be through the use of options. Two simple strategies can be applied. One is the sale of covered call options against underlying stock or ETF positions. In this strategy, you (the option seller) receive money from a speculator (the option buyer) in exchange for an agreement to sell your stock only if it reaches a specified price (higher than the one currently listed). the purchase). 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 out, and are free to sell more options against that stock position.
The other strategy is to simply buy a put option. This gives you the right to sell your position in a stock or ETF you own at a predetermined price within a predetermined time frame. For this privilege, you will pay money (a premium) to the potential buyer (seller of the put option) of your shares. This strategy should be implemented in periods of low volatility, as the cost of the transaction will increase as the markets begin to fall.
Buy With Conviction
Let’s say you’ve had a stock that has performed well over time. The stock has had a history of rising revenue, earnings, and dividend increases. It seems that stocks usually go up when the market goes up, only now there has been a big sell-off in the market and stocks have dropped drastically due to market conditions. It may be time to do some research on the company and make sure that the drop is simply due to a bad market in general. If that turns out to be the case, it may be time to buy more shares. Big companies often go up for sale at market downturns, only to have dramatic rallies once the downturn is over.
Talk to your wealth management team
You should also check with your finance manager when markets are volatile. Investment professionals are in the business of understanding what is causing market volatility and can often provide some insight. Many times, your investment professional can help ease your anxiety and remind you of your commitment to your financial allocation and goals.