Friday Oct 22, 2021

Invest in a volatile environment

The volatility we have recently experienced in the market is very concerning to some investors. Unfortunately, investors who hit the panic button and sold are recognizing huge losses on their portfolios only to turn to investments that are perceived as safer places to invest.

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

Losing investment capital in a volatile market

According to Fidelity Investments, investors who sold their 401 (k) holdings as the market crashed between October 2017 and March 2018, and then held on to the sidelines, have only seen their account value increase by about 2%. , including contributions, through June 2019. This compares to those who held and saw account balances recovered by about 50%. During periods of extreme volatility, wealth managers will often tell clients to stay invested rather than sell and lock in big losses in a bumpy market.

Building confidence in your strategy is one way to avoid making the mistake of buying high and selling low. Having the mental 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 unsure of how to select high-quality investments, consult a financial manager or registered investment advisor.

The question is; How do you get into that state of mind? It is not easy if you are the type of person who tends to have knots in the stomach when the market goes down. Here are some steps that could increase your confidence level.

Conquering the fear of volatility

One step you should take to better manage volatility is to ensure that you have adequate cash reserves for a financial emergency that may arise. This way you will not depend on your portfolio for unforeseen expenses and your anxiety level will be lower, knowing that you do not need to sell your investments when they have fallen in value.

Make sure you have an investment mix that fits your risk tolerance and time frame. This can be achieved by considering how you have felt when there have been market crashes in the past. You Wealth Management The advisor should be able to provide you with a thought-provoking questionnaire and will give you a score when you complete it. The score on the quiz will have a corresponding asset allocation that you can use to determine the division you will have between stocks, bonds, and cash.

Once your assignment has been determined, stick with it. It is good practice to reallocate your assets on a regular basis to maintain the same level of risk. This means that a portion of the best performing investments will be sold (sell high) to buy in order to buy shares in those that have not performed as well (buy low).

Other ways to hedge volatility can be through the use of options. Two simple strategies can be applied. One is the sale of hedged call options against underlying stocks or ETF positions. In this strategy, you (the option seller) collect money from a speculator (the option buyer) in exchange for an agreement to sell your shares only if it reaches a specific price (higher than where it is trading at the time of the sale). transaction). The option must reach the target price (strike price) within a predetermined period of time (expiration date). If not, the contract expires, you keep the money paid, and you are free to sell more options against that stock position.

The other strategy is to simply buy a put option. This entitles you to sell your position in a stock or ETF that you own at a predetermined price within a predetermined period of time. For this privilege, you will pay money (a premium) to the potential buyer (seller of the put option) of your shares. This strategy should be implemented in periods of low volatility, as the cost of the transaction will increase as the markets begin to fall.

Buy with conviction

Let’s say you’ve had a stock that has done well over time. The stock has had a history of rising earnings, earnings and dividends. It seems that stocks tend to go up when the market goes up, only now there has been a big sell-off in the market and stocks have fallen dramatically due to market conditions. It may be time to do some homework on the company and make sure the downturn is due to a generally bad market. If that turns out to be the case, it might be time to buy more stock. Large companies often go for sale on market downturns, only to have dramatic rallies once the market downturn is over.

Talk to your wealth management team

You should also check with your financial manager when markets are volatile. Investment professionals are in the business of understanding what is causing the market volatility and can often provide information. Often times, your investment professional can help ease your anxiety and remind you of your commitment to your financial allocation and goals.

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