Volatile Markets: Here’s How to React

Shutterstock

Newcomers to investing have enjoyed a long period of largely uninterrupted gains. They may not be as familiar with the inevitably volatile market that more experienced investors have endured.

Stock Market Volatility

For the less experienced, a volatile market refers to times when the common ups and downs in the market happen with greater frequency.

For some, this volatility strikes fear into them and they become defensive. Others, however, see dips in prices as good investments. 

With the availability of investment apps, we can respond immediately to this volatility. And whether you take a defensive or offensive approach, there are strategies for protecting and capitalizing during these volatile markets.

Here’s some tips on how to react to volatility.

Volatility Index

One valuable tool investors can use to mitigate risk is the volatility index (VIX). Savvy investors know the actual level itself isn’t as important as how the current level compares to recent trends.

The higher the level, the more fear there is in the market.

How to Endure Volatility

Inverse ETFs, options, cash and equivalent securities, and assets not correlated to the broad movement of the stock market are tools to hedge against your portfolio.

Put and call options played along with small positions in short-term trades can provide gains to offset any losses.

The long-term investor can also benefit if an asset they like temporarily goes “on sale” from the dips that come along with volatility –– especially if the dip is caused by an emotional reaction, and not fundamentals.

For the more defensive investor, bonds and gold are two popular options for those seeking a safe haven. These both typically rise when the market is falling.

A regular review of the diversity within your portfolio can also protect you during volatility. If gains lead to you being overweight in one industry and you see that as a vulnerability, consider shuffling your investments so your allocations are more even.  

Limit orders also provide protection during volatility by specifying the maximum price you’re willing to pay when buying a stock, and setting the minimum price you’re willing to accept when selling a stock.

During times of higher-than-average volatility, it may make sense to sell some stock from a position that has seen significant gains. By taking partial profits off the table and hanging on to the gains as cash, you can help protect those profits and lower your overall risk.

Sticking It Out

Market volatility can be unsettling for traders, but many see the fluctuations as an opportunity. Just as markets don’t go up forever, they also don’t go down forever.

Periods of heightened volatility are usually short-lived. If you don’t have a good feeling about where the markets are heading, just trust your strategy by standing pat, or sit it out altogether.