Investment strategies in a volatile market
Markets are never stable. Investors know that the market is cyclical, where it booms and corrects periodically. But what to do during extreme ups or extreme downs?
Taking the wrong choice can cause a significant loss or completely erase all the wealth that you have previously created in your portfolio.
This article will help you with some of the best investment strategies in a volatile market. Continue reading to know more
What are the basic things you can do to deal with market volatility?
Some precautions you as an investor can take to reduce the impact of overall market volatility on your portfolio. How?
- Do a periodical review of your portfolio. This helps you know the performance of the investments that you have chosen. It indicates the efficiency and effectiveness of your portfolio.
- It helps you analyze whether or not your investments align with your goals and objectives.
- Have a rebalanced portfolio. Periodically rebalancing your portfolio will help you minimize the overall portfolio volatility.
- A rebalanced portfolio will efficiently capture the up-market and the down-market movements. It is capable of efficiently controlling losses during major market corrections.
- Have a well-diversified portfolio. When starting your investment journey, you should ensure you have a well-diversified portfolio that helps reduce portfolio volatility. The assets will compensate for each other’s performance in a diversified portfolio.
What are the best investment strategies in a volatile market?
1. Index fund
An Index Fund invests in the company stocks of a benchmark index in the same proportion as the index. The fund does not intend to outperform the benchmark and move along the benchmark it is invested in.
There is no active investment strategy or change in the fund’s portfolio. Therefore, the volatility is much lesser compared to other equity funds.
The ideal investment horizon is 5-7 years and is best for investors with a low-risk appetite and who are okay with steady, stable returns.
2. Balanced fund
Balanced funds are hybrid funds that provide investors with long-term capital appreciation with exposure to both equity and debt.
There are options like aggressive hybrid and dynamic asset allocation funds (DAAF). A DAAF follows an intelligent asset allocation strategy within the fund.
The debt-equity ratio is periodically balanced and changed based on market conditions and requirements. If the market is corrected and undervalued, the fund automatically increases the equity component and reduces the debt component with the growth forecast in mind.
Whereas, if the market is overvalued already, the fund will reduce the equity exposure and increase the debt component to avoid the fund from facing heavy market corrections leading to a loss.
3. Debt funds
The safest bet against market volatility is debt funds. You have options like corporate, municipal, short-term, etc. They are highly liquid and generate returns that beat inflation.
This investment option is best for investors with a small investment horizon or in their retirement phase who depend on their savings and have a minimal risk appetite.
4. Staying invested long-term
Volatility and market fluctuations are more evident in short-term horizons. Investing for an extended period and not paying attention to the short-term market movements helps your wealth creation objective.
At the same time, you should have a strong strategy and a well-diversified portfolio. Again, do not blindly follow the buy-and-hold strategy.
Please research before investing in any instrument and plan to hold it for an extended period.
The bottom line is that a portfolio should have a mix of different investment instruments. There is a saying that “you never put all your eggs in one basket”.
This means that by investing all your money in one place, your entire portfolio is directly correlated to the movement of that instrument, in short, concentration risk.
Different instruments give you benefits and varying returns from all the assets. Never sell your investments during extreme market volatility, even if your portfolio has significant losses unless you need liquid money.
Instead, use this as an opportunity to invest more and acquire units of the instrument at discounted rates. This will help you average out your losses and generate good levels of return on your portfolio.
Consult an expert advisor to get the right plan