Investing in a volatile environment

The volatility we have seen recently in the market is very worrying for some investors. Unfortunately, those investors who have pressed the panic button and sold out realize significant losses in their portfolios only to turn to investments that are seen as safer places to invest.

The fact of the matter is that we invest our money to earn long-term rates of return that exceed the rate of inflation and help us maintain our purchasing power. Historically, cash has been the worst place to invest for the long term.

Loss of investment capital in a volatile market
According to Fidelity Investments, investors who sold their 401(k) holdings while the market was crashing between October 2017 and March 2018, then stayed on the sidelines, only saw their account values ​​increase by about 2%, including contributions, through June. In 2019. This compares to those who held account balances and saw them bounce around 50%. During periods of high volatility, wealth managers often ask clients to keep investing rather than sell and incur significant losses in a swing market.

Building confidence in your strategy is a way to avoid making the mistake of buying high and selling low. Having the conviction to tell yourself that you have a carefully planned portfolio of high-quality investments goes a long way toward getting through the toughest days of market volatility. If you are not sure how to choose high-quality investments, consult a registered financial manager or investment advisor.

the question is; How do you reach that state of mind? It’s not easy if you’re the type who tends to get a hold in your stomach when the market is down. We summarize some steps below that may be able to increase your confidence level.

Conquer the fear of volatility
One of the steps you should take to better deal with volatility is to ensure that you have sufficient cash reserves for financial emergencies that may arise. This way you don’t rely on your portfolio for unexpected expenses and your anxiety level will be lower, knowing that you don’t need to sell your investments when their value goes down.

Make sure you have a mix of investments that matches your risk tolerance and time frame. This can be achieved by thinking about how you felt when previous market dips occurred. for you wealth management The advisor should be able to provide you with a thought-provoking questionnaire that will give you a score upon completion. The result in the survey will have a similar distribution of assets that you can use to determine the split you will have between stocks, bonds, and cash.

Once you’ve selected your customization, stick with it. It is good practice to reallocate your assets on a regular basis to keep your risk level the same. This means that a portion of those investments with better performance (selling high) will be sold in order to buy shares in those that did not perform well (buy low).

Other ways to hedge volatility can be through the use of options. Two simple strategies can be applied. The first is to sell covered call options against the underlying stock or ETF positions. In this strategy, you (the seller of the option) collect money from a speculator (the buyer of the option) in exchange for an agreement to sell your shares only if it reaches a specified price (above the price it was traded at at the time of trading). Transaction). The option must reach the target price (the strike price) within a predetermined time frame (the expiration date). If it doesn’t, the contract expires, you keep the money paid and you are free to sell more options against that stock position.

The other strategy is simply to buy a put option. This gives you the right to sell your position in a stock or ETF you own at a pre-determined price within a pre-set time frame. To obtain this privilege, you will pay money (a premium) to the potential buyer (seller of a put option) of your stock. This strategy should be implemented in periods of low volatility, as the transaction cost will increase as the markets begin to fall.

buy with conviction
Let’s say you own a stock that has performed well over time. The stock has had a history of increasing revenue, earnings, and increasing dividends. It seems that the stock usually goes up when the market goes up, and only now there has been a big sell-off in the market, and the stock has fallen dramatically due to market conditions. It might be time to do some homework and make sure the drop is caused by a bad market in general. If so, maybe it’s time to buy more shares. Big companies are often sold off under market dips, only to make a big rebound once the market slump is over.

Talk to your wealth management team
You should also consult with your Financial Manager When the markets are volatile. Investment professionals work to understand the causes of market volatility and can often provide some insight. Oftentimes an investment professional can help ease your anxiety and remind you of your commitment to your allocation and financial goals.