Managing Volatility: How to Prepare for Stock Market Uncertainty

From time to time, volatility in stock markets is inevitable as investors react to changes in the economic, political and corporate environment.

Take the recent Brexit reaction for example: down a couple of days, back up a few days later.

As an investor, it is important to take a step back at these times and keep an open mindset. 

When we are prepared at the outset for episodes of volatility on the investing journey, we are less likely to be surprised when they happen, and more likely to act rationally rather than react emotionally.

By having an open mindset and a longer-term investment perspective that accepts short-term volatility, investors can begin to take a more dispassionate view.  Not only does this help with the job of staying focused on long-term investment goals, it also allows investors to begin to exploit lower prices rather than lock in losses by emotionally selling during times of volatility.

The key to weathering market volatility is preparation.

It’s impossible to predict the short-term direction of the markets, but there are certain principles investors can follow to help develop a sound investing plan for the future.

1. Active Investment Management

Markets can deal rationally with both good and bad news, but what they don’t like is uncertainty.  For example, the Brexit referendum was not expected; there is bound to be uncertainty for markets to grapple with over the coming months.

When volatility increases, the flexibility of active investing can be especially rewarding compared to the rigid allocation of passive investments.  When indexes are down, passive index-tracking investment funds are down even more.

These are the times in which active managers prove their worth.

Many active managers have positioned their portfolios for uncertainty through active security selection.  The result is that losses are mitigated.

Equally important, they are picking up fundamentally good business operations that are insulated from uncertainty.  They are holding more cash and tend to be holding more safe-haven assets, such as the U.S. dollar and gold.

Contrarily, the index trackers are always going to own the good and the bad.  Whereas, the active managers will mitigate downside risk, capitalize on technical dislocations and create better conditions for investors toward long-term prosperity. 

2. Global Asset Allocation

Attempting to move in and out of the market can be a costly affair, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods.  Many of the best periods to invest in stocks have been those environments that were amongst the most unnerving.

Investors can spread the risk associated with specific markets or sectors by investing into different investment buckets to reduce the likelihood of concentrated losses.  For example, holding a mix of ‘risk’ assets (equities, real estate and credit) and defensive assets (government and investment grade bonds, and cash) in your portfolio can help to smooth returns over time.

Investing in actively managed multi-asset funds provides asset level and geographic portfolio diversification.  These funds are constructed on the basis of strategic long-term asset returns, with asset weights managed tactically according to expected conditions.  Spreading investments over different countries can also help to bring down correlations within a portfolio and reduce the impact of market-specific risk. 

3. Take Gains

Ultimately, market volatility can create long-term buying opportunities.  While investors need to tread carefully, these events present unique opportunities for active money management to add value through active security selection.

Taking gains made in the equity portion of your portfolio during this current 7 year Bull Market run will result in a more defensive stance that will further position your portfolio for the uncertainty surrounding world markets.

Is your Portfolio Prepared?

Are you comfortable your portfolio is prepared for a range of potential market scenarios?

This is an opportune time to review long-term objectives and the advantages of sticking to long-term financial plans as this will prove much more effective than trying to time the market.

Contact me directly for a personal review of your portfolio at 416.838.3617 or nparkhouse@GravitasSecurities.com