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Highlights
- A-VIX, which represents the volatility of the benchmark ASX 200, had risen by a massive 88.67% to 20, as of 11 March 2022.
- Fundamentally strong stocks are more resilient during a market crash than their small-cap peers.
- Diversification can help stabilise portfolio returns during high-volatility periods.
To make money in financial markets, investors have to sail through periods of high and low volatility, especially when investing in equities. Volatility in simple terms is the pace by which price change takes place (in either direction). However, there are times, such as the current Ukraine-Russia war, when the market becomes extremely volatile to be handled even by seasoned investors.
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A-VIX, which represents the volatility of the benchmark ASX 200, had risen by a massive 88.67% to 20, as of 11 March 2022. This kind of volatility explosion is one of the main reasons why investors find it difficult to make money in the long run. However, there are a few tips, investors can use to sail through these volatile times and achieve their long-term goals.
Read More: How are bond prices related to the stock market?
- Focus on fundamentally strong companies
While investing, an investor is bombarded with a never-ending list of stocks to make a strong and robust portfolio. However, due to the finite amount of capital, it becomes imperative to carefully narrow down the list of stocks to be analysed and invest upon. One easy way out is to pick strong companies with a proven track record, robust balance sheet and an increasing trend of revenue growth.
Such companies generally have a large market capitalisation and are often included in the benchmark index of the country. Both these factors make the screening process a bit easier for investors.
- Diversification is a must
As legendary investor Warren Buffett has rightly said, never put all your eggs in one basket, having a very high concentration of stocks from one sector could be very risky. Investors should diversify their holdings across different sectors and asset classes which helps to improve the stability of overall portfolio returns.
The underlying premise of diversification is, it is less likely that all the sectors or asset classes would fall in tandem with each other. For example, when oil prices rally, the aviation sector takes a hit, but at the same time, a positive impact is seen on oil exploration companies.
- Always keep cash ready
High-volatility periods often lead to huge price swings which also poses for a good opportunity to capitalise on down moves. The erratic price movement, which kicks out short-term traders, gives long-term investors a slim chance to deploy cash and pile up stocks on relatively discounted prices.
It may also happen that the stock might keep on tanking to lower levels and might take long to recover or to break even, that is why we have suggested selecting fundamentally strong stocks for the portfolio. These stocks are generally more resilient towards market crashes and tend to lead the rally once the market starts to recover.
Bottom Line
Investing journey is full of ups and downs, which unfortunately cannot be avoided. However, using proper risk management and a few simple techniques, investors can definitely reduce the volatility of the overall portfolio and save themselves from being shaken out.
Read More: Why Telstra (ASX:TLS) is on investors’ radar amid Russia-Ukraine conflict
