Many investors during volatile times begin to question their investment strategies. It is important to accept that the market volatility is unavoidable and such trying times do exist. It is the nature of the markets to move up and down in short-term and hence investors must develop their own ways to deal with it. Following points can be kept in mind:
Use Stop Loss
Don’t get sentimental with stocks in your portfolio. Keep a close watch on market news and don’t be afraid to bear some loss – it is market after all. But always make sure you enter and exit at optimal price points.
Stop Loss Trigger Price (SLTP) could be used to execute orders conditionally, that is, orders will be executed only when market trade level reaches a threshold price point defined by investor. Thus, SLTP helps you minimize losses and relieves you from the hassle of monitoring market on almost real-time basis. This strategy could give you good returns in the long run and will save you from risks associated with market volatility.
Make SIP your friend
Good investors invest regularly and consistently. With systematic investment plan (SIP), as the name suggests, you can build an investment portfolio with a small, well-planned investment at regular intervals to protect your investments and let your savings flourish.
Identify couple of stocks with good fundamentals which have yielded an average return of more than 15% in last five years, have large market capitalization and decent market debt. Such stocks are normally expected to perform in long run. Fix up a monthly installment using systematic investment plan (SIP) and get used to habit of saving and growing your money.
Develop technical analysis skills
Making money in the market consistently is possible only when you have sufficient knowledge of the markets and skills for technical analysis, which is the science of forecasting prices. Analyze balance sheets, price trends, dividend yields, quarterly and annual results and market news while picking up a stock.
Buy and hold strategy
In long term, market is driven by fundamentals where short term fluctuations become less significant. Hence, volatile markets are probably the best time to invest in the companies that have strong balance sheets, consistent earnings and dividend yields. Generally, apprehensive investors like to stay away from market during volatility and prefer to wait till it shows signs of stability. However, a better strategy is to buy fundamentally strong stocks in volatile markets and hold them patiently for long term returns.
If you want to play very safe during volatile markets, park your investments in other instruments like fixed deposit, bonds, national savings certificates and gold. It is normally better to earn low interest than to expose yourself to high risks in volatile market.
Hedging is an effective method of controlling risks. This is done by taking a position in the futures market that works opposite to the one in the physical market. This works perfectly well to reduce or limit the risks associated with price changes.
Hedging is a two-step process. A loss in the cash position due to changes in present price levels will be countered by gain in the value of a futures position. On the other hand, a drop in the futures prices position will be offset by a rise in the present price level. Thus, effectively managing to keep you protected from risks.
Investors need to be aware of the potential risks that arise due to market volatility. Consider taking proper expert advice to get a better understanding of the market situation to chalk out your course of action. If you do decide to trade during volatility, remain cautious of the market risks and make an informed and researched decision.