10 Tips to Make Your Portfolio Handle Market Volatility Well
Investing in the market comes with both rewards and downfalls. The cyclic nature of the market can present many unexpected turns. As cautious as you are with your investment decisions, instances of natural calamities, political upheaval, and a global pandemic such as COVID-19, can rile up the market and negatively impact your returns. Fortunately, since it is a well-known fact that the inherent nature of the market is volatile, experts have identified some practices that can bring stability to your portfolio, even in unfavorable times.
Here are 10 tips to make your portfolio handle market volatility well:
- Keep an emergency fund in place
- Diversify as much as you can
- Pay attention to asset allocation strategies
- Avoid panic in hostile conditions
- Continue saving your money
- Invest in high dividend stocks
- Keep some cash or cash equivalents
- Keep your mind focused on the larger picture
- Consider tax-loss harvesting
- Learn from past mistakes
An easy way to take out risk from your portfolio is by maintaining an emergency fund. An emergency fund offers you financial protection in urgent times. It ensures that you have a corpus to rely on. In a volatile market state, even if your other investments are not performing well and you are finding it hard to sustain yourself on a limited income, you can depend on your emergency fund to move on to greener pastures.
Diversification can be one of the most effective strategies to deal with market volatility. The guiding principle of diversification is that no two investment instruments would likely perform in the same manner. Therefore, even if some stocks fall, others will still rise. In the 2020 pandemic, while the airline and tourism industry suffered great losses, personal care, healthcare, and similar essentials saw a significant hike in sales. Each cause of volatility affects businesses in a unique way. Therefore, it helps to diversify your portfolio to create a suitable balance.
Asset allocation largely depends on your age and investment goals. People who are in a dire need of funds like for a child’s college fee or those who are close to retirement would require a large pool of funds in a considerably shorter time frame. Their risk appetite would also be low at this time to avoid any last-minute surprises. On the other hand, people with a considerable amount of time at hand may settle with more risk and be open to taking a chance. Your asset allocation can reflect these requirements.
Most people panic at the very sight of market numbers falling and sell their stocks as a way to recuperate. However, it is important not to panic in such situations and instead be patient to see how the stock performs in due time. Financial advisors can also be helpful in such times as they can guide you better on the necessary steps to follow. Despite what you see on your screens, you must keep in mind that you will not lose out on money until you sell your stocks at a loss. Therefore, letting things be and waiting for the market to recover may be more beneficial.
As a rule of thumb, keep your investments and savings separate. A lot of investors think of investing and saving as interchangeable terms and substitute one for the other. Investments always come with a certain degree of uncertainty, but savings can guarantee you safer returns. Keeping yourself protected by saving in retirement accounts such as an individual retirement account (IRA), a 401 (k) account, or even an employer-funded pension plan can result in added financial flexibility and stability.
High dividend stocks provide security, even when the market is volatile. This happens because while the stock price dips, you still earn dividends from it. A steady dividend income can offer some respite when all other investments may be falling. Regardless of how the market functions, investing in high-dividend stocks is always advised.
Since most investments come with a unique set of contribution and withdrawal rules, penalties, taxes benefits, etc., it helps to ensure liquidity. Cash reserves offer ease of access when times are rough. Options such as savings in the bank come with no stringent limits, penalties, or tax issues. You can use this money for your daily needs or spend it on bigger purchases. Either way, it provides you with peace of mind.
Market volatility is often short-lived. Therefore, what matters more is that you are able to ride out such adversities in time. Concentrating on the end goal will help you stay calm in the present. It will also allow you to rationally think of the best roadmap to achieve your final target. Remember that such a low phase will eventually pass and your returns will improve soon enough.
Tax-loss harvesting is a good strategy for investors to turn around their losses into their favor. This offers great tax benefits, reduces capital gains tax, and helps to reduce the loss burden borne by you. However, you must remember to wait for at least 30 days after the sale of a stock before you reinvest in a new stock.
Studying past trends can present a realistic view of how a stock is likely to perform in the future. Although not entirely accurate, analyzing and evaluating the past performance of a stock can help you make better decisions in the present as well as for the future. In times of volatility, you can refer to these trends to make the best judgment call.
To sum it up
As an investor, it helps to prepare yourself for unexpected outcomes. Your investments may not always grow as you hope. Several factors can alter their course over time. The stocks that go up today may come down tomorrow. It is impossible to change the nature of the market, but the ways mentioned above can provide some sense of security and peace of mind.
If you want to safeguard your portfolio from the volatility of the market, you can get in touch with Financial Advisors for some professional guidance.