From the current COVID-19 situation to the future, markets will always face periods of uncertainty and volatility. A measured approach to investment management can assist with supporting your investment portfolio in these periods. In this paper, we discuss four common approaches.
Market volatility refers to the magnitude of upward and downward movements in asset prices over a period of time. A company whose stock price moves up and down by 1% daily is considered less volatile than one with 5% daily moves. Investors tend to think of volatility in terms of downward market movements, as we are currently seeing, but it can equally relate to the pace of rising markets.
Approaches to managing volatility
Different assets, regions and sectors may react differently to market events and perform better in certain market conditions. For example, travel and tourism are struggling in the current situation while supermarkets are thriving. For this reason, spreading your money across a range of investments can help balance your exposure to volatility experienced in different areas.
2. Incorporating more stable, less cyclical investments
Some investments may not offer high growth but tend to be consistent across a range of markets. For example, essential services infrastructure is needed regardless of market conditions so can continue to offer stable performance in times of volatility.
3. Alternative investments
Some investors seek out investments which specifically perform differently to share and bond markets. The aim of this strategy is to help neutralise any negative outcomes experienced in share and bond investments. One asset used in this way is gold which typically has a low or negative correlation with other asset classes.
4. Strategic tilts
For certain investors, incorporating short-term investments during market volatility might be part of their strategy. This might mean temporarily adding defensive investments to help protect their portfolio or it might mean seeking out high growth (riskier) investments if they believe there may be opportunities from an eventual market recovery.
ETFs can be an effective tool for investors in periods of market volatility. They can assist by offering broad exposure and instant diversification in a liquid and cost-effective manner. The wide range of specialised ETFs available on today’s stock exchanges also offer investors choice and flexibility in how to adapt to changing market conditions.
Beyond these measures, it’s worthwhile stepping back to consider the what, why and how of your investments rather than simply following the crowds. It can also help to speak to a financial professional about your strategy and options.
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