3 Tips to Manage Short-term Market Volatility
Daily market volatility has reached levels not seen since the Global Financial Crisis more than a decade ago, taking investors on a wild journey in recent weeks.
Constant worries about the spread of the coronavirus and subsequent economic shocks as governments and businesses work to stem the virus’s progress have contributed to increased market volatility, and these concerns aren’t going away anytime soon.
But it’s not wise to let yourself be influenced by the daily fluctuations of financial markets, especially if you react to volatility by making rash investment decisions.
Instead, investors should have a long-term investment strategy and diversified asset allocation plan in place, and stick to it through rising and falling markets alike.
In a Downturn, Avoid These Three Common Mistake
1. Failing to Have a Plan
An investor who doesn’t have a game plan is more likely to make mistakes like performance chasing, trying to time the market, or giving in to market “noise”. During market downturns, investors seeking to protect their investments are especially susceptible to such temptations.
2. Fixating on Losses
Most investors will experience multiple market downturns. You won’t lose stock in a slump unless you sell. Indeed, if you reinvest your fund’s income and capital gains dividends, that figure will rise. Your investment portfolio should also benefit from a market uptick.
3. Overreacting or Missing an Opportunity
Some investors, seeing asset prices decline, may act irrationally by selling off riskier holdings and shifting into safer investments like government bonds or cash. However, it’s a bad idea to sell hazardous assets during periods of market volatility in the hope that you’ll be able to predict when to reinvest your money in such assets.
A Minimum Volatility Approach
The usage of actively managed funds and exchange traded funds that aim to outperform the market on the basis of narrow investment indices was mentioned.
We also mentioned “minimal volatility” factor funds, which attempt to lessen the impact of market volatility on a portfolio by actively weeding out the most erratic companies.
Long-term investors who seek a more stable rate of return on their stock investments may find minimum volatility funds appealing.
The goal is to limit loss by purchasing some protection against the market’s decline while still enjoying the gains from the equities market’s upswing.
When combined with other equity holdings, minimal volatility funds can provide a useful diversification strategy for a diversified portfolio. They look for stocks that have a lower volatility profile than the market average but do not produce returns that are much lower.
This allows the fund to spread its bets across a wide number of stocks with lower historical volatility than the market, with the hope of earning higher risk-adjusted returns over the long term than the market as a whole.
Portfolio optimization, which aims to build the least volatile portfolio prospectively, is typically used to calculate weightings of shares. The shares are more concentrated, shielding against the downside risk more, and currency hedging can reduce or eliminate foreign exchange risk when combined with a strategy.
Lowering Volatility Can Pay Off
Fund volatility has been significantly lower relative to the market index during extremely volatile periods such as the one we are currently experiencing.
There is empirical evidence that portfolio volatility can be reduced by 30–40% using a low volatility strategy relative to the market as a whole.
Strategies that aim to reduce volatility in the market are appealing because they may give investors with a more stable return on their investment than a more general market index.
Investors are becoming more interested in using minimum volatility funds as a supplement to their exposure to the broader equity markets, as seen by the rise in assets under management.
As with any active investment strategy, it’s crucial to take the time to grasp the objectives and be cognizant of the dangers, which may include periods of underperformance, and a minimum volatility strategy can assist weather tumultuous markets.