How to navigate volatile stock markets

September 06, 2019
Taryn Lee-Johnston

Although previous Prime Minister, Theresa May famously commented on the need for “strong and stable government”, something we most certainly do not have at the time of writing! However, the fact still remains that the UK is currently navigating its way through extremely choppy political waters and the stock market is reacting accordingly. In fact, ever since the “Leave” result was announced, the stock market has been a fairly accurate reflection of the market’s feelings about the state of the Brexit negotiation. Although the issue of Brexit may be unique to the UK (and possibly the EU as well, depending on your point of view), there are plenty of other countries experiencing their own issues – and corresponding volatility in their stock markets. With this in mind, here are three tips on how to deal with market volatility.

Accept them as a reality

Volatility happens, it really is that simple. It’s nothing personal, it’s nothing you’ve done wrong, it’s just the way markets work and that means that, as an investor, it is very likely that, at some point in your life, you are just going to have to take a decision on how you’re going to deal with it. The good news is that not only is it possible for investors to navigate volatile markets, but it’s also possible to make good profits in them.

Recognise that volatility has its advantages

Market volatility can potentially offer two major advantages to serious investors. Firstly, it can reduce competition from other investors. The more cautious may prefer to “sit out” periods of volatility and focus instead on other assets such as cash, near-cash and property. Secondly, it can provide opportunities to pick up equities at bargain prices. Just as a rising tide floats all boats, so a falling tide can drag down even the best boats – over the short term. At least, it can drag down the prices at which they sell. Robust companies, however, will still be able to perform, even in a market downturn. For example, younger companies will still be able to show growth and more mature companies will still be able to produce dividends. The growth and/or dividends may be more restrained than usual, but the price-to-earnings ratio could still be very attractive, thanks to the overall downturn. Likewise, a market downturn could provide you with an opportunity to fine-tune the diversification of your investment portfolio (and possibly your assets in general), again, taking advantage of the fact that you are in a buyer’s market.

Keep a steady course yourself

Of course, your investment strategy will need to be updated as your life changes. In fact, this is one of the main arguments for taking professional advice on a regular basis. A financial professional can specifically prompt you to think about (potential) changes you might otherwise have overlooked until it was too late and hence put you in a position to take action about them. They can also make suggestions as to how to prepare for the situation and again, since they are professionals, they may be able to suggest changes you might otherwise have overlooked. You do not, however, want to allow yourself to be panicked into making changes due to short-term market conditions. The keywords here, are “panicked” and “short-term”. It may be perfectly reasonable for you to adjust your investment portfolio in response to short-term circumstances if you believe that their impact is significant enough to warrant it. Similarly, it can make sense to adjust your portfolio in response to a change which you believe is likely to have a long-term impact. In either case, however, you want to act mindfully, knowing not just what you are doing, but why you are doing it and what outcome you expect to achieve.

 

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