Most guides and sources will, before providing any explanation about any investments, warn you that investing is a tricky balancing act, one that requires thorough research, willingness to take risks and, that, despite all you can do to prepare, investing requires, more than anything else, an investment instinct.
However, sometimes, even the best investor might not be able to weather a storm of volatility. In a volatile market, torn between bullish and bearish phases, the singular most important factor that might help investors stay afloat and minimize their losses, is a highly diversified investment portfolio. But before we dive into the functioning of the market and how to neutralize its effect, we first must establish what a volatile market really is, and why it is an inevitability every investor must prepare for.
Volatility in the Market
Volatility is defined as the propensity for returns to be dispersed for any given market index. Market volatility implies that prices in that market move at a quick and unpredictable rate. For instance, while an investment option may appear to be a safe and fruitful investment, if that security is part of a volatile market, its price could either skyrocket or in most cases, drop. Volatility breeds further volatility, as security prices are largely dictated by the whims and fancies of investors, and investor beliefs, particularly in the equities market.
Thus, the only real way to protect against volatility in the market is to diversify one’s portfolio with short and long term investments; a combination of riskier investments that have a higher and quicker payout, and longer-term investments that are less susceptible to market forces and provide steady, albeit reduced returns. This article will help outline a number of investment options that may help investors make it through a volatile market with their losses minimized.
1. Invest in high dividend stocks
One unique way to protect against the negative effects of a volatile market on your portfolio is to invest in stocks with high dividends. In a market that is crashing or is in a waning period, the income you earn in the form of dividend payment from these high dividend stocks can provide some cover against crashing stock prices. However, it is worth noting that due to a combination of the fact that higher dividend increases demand which increases the price and that high dividend stocks are most likely to be offered only by larger corporations, investing in high dividend stocks can be an expensive one.
2. Invest in value stocks
This next method of investing that may help ride out market volatility is to invest in value stocks. Value stocks put in simpler terms are stocks that offer the best deal. A bargain. A stock that has temporarily fallen not because of slack in performance, due to factors external to the functioning’s of the company such as a lawsuit or negative media coverage, but has a strong core business model and can thus be expected to recover quickly. These stocks have reduced prices as they are looked at by investors with caution. While identifying companies that can prove to be value stocks (there is a thin line between a value stock and a worthless one) can be a tricky endeavor, they prove to be one of the best long term payouts.
Additional Read: Which Investment Option Is Best For The Risk Averse Investor?
3. Cash and other safe assets
Cash, or liquid money is most sought after by any individual who is in the pursuit of wealth as it is quite literally money in hand, and cannot be touched by interest rates, stock prices or tax rates. From an investment viewpoint however, cash is the worst investment, as there is no possible way of multiplying it, short of investing it elsewhere. However, while one must not hoard all their cash, having a secure and safe amount of cash saved up for a rainy (or volatile) day may prove to be paramount is minimizing losses. The fact that cash cannot be multiplied, from a glass half full perspective also means that it cannot be divided or dissipated further. Therefore, even in a volatile market, the cash you have in hand, will hold its value regardless of how vigorously market forces sway.
Storing this cash in relatively stable investments such as Gold, commonly regarded as the crisis commodity, is also a great way to invest in times of volatility. This can be seen very clearly in the Covid, pandemic, where demand for Gold has surged over the course of the year. Gold has always moved contrary to the market, and is a great means by which to park excess cash and possibly get a return in the short-term, though it is now a little prohibitively expensive, and is highly volatile itself, fueled as it is by investor outlooks.
Additional Read: What should be your investment strategy in a post Covid world?
Though Investing can be an extremely lucrative and exciting endeavor, one must always keep in mind that it is also a risky one, particularly in times of volatility. Investing safely should be prioritized over investing more and making risky investments. If you’re looking to invest in today’s economic climate, the Moneyfy app by Tata Capital can help you create an investment strategy suited to your financial goals. Using it, you can compare a variety of Mutual Fund investment options, track your financial goals, and even secure loans and insurance.