Investing Commentary

Preparing Your Portfolio for Greater Volatility

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4332288_sWith the Dow Jones Industrial Average flirting with 18,000 it may seem untimely to consider the possibility that greater volatility might visit the equity markets.

But volatility is often what follows record markets. That means now is the perfect time to begin preparing your portfolio for greater volatility.

What are some strategies to do that?

Shift Into Safe Investments

This does not mean you have to begin a wholesale conversion of equity investments into fixed income securities. But it is an excellent time to begin a gradual shift. You don’t necessarily have to begin selling off equity positions to do that either. It might be better to hold the positions that you have, but move fresh cash into interest-bearing investments that will not be subject to the risk of wide swings in stocks.

You can put money into Treasury bills, money market funds, or certificates of deposit. Forget about the dismally low rates of interest that they’re currently paying. The primary purpose of safe investments is to enable you to preserve your capital during times of turbulence. And once the markets settle down once more, you’ll have the capital that you will need to begin buying up bargains.

One word of caution here: be careful about buying bonds! This is particularly true if those bonds have a maturity of greater than 10 years. Bonds tend to behave a lot like stocks, particularly when they are long-term. This can make them poor substitutes for stocks in volatile markets.

Add Some Income to Your Stock Portfolio

Dividend income has a way of stabilizing stock prices even in volatile markets. Where in bull markets investors are pouring money into growth stocks, volatility is usually the sign to shift into stocks that will provide income.

One of the advantages to this strategy is that even if stock prices fall, the dividend income will enable you to collect a cash flow which will make it easier for you to ride out any declines.

Look for stocks that are paying above average dividends, and are in relatively stable industry sectors. You can also put money into growth and income type mutual funds and exchange traded funds.

Search For Undervalued Assets

Volatile markets are often an excellent time to begin looking for undervalued investment sectors. Bull markets tend to go with the winners, often something like the Nifty Fifty. It’s often more about following the herd on the elevator ride up, than it is about finding investments of real value. But that dynamic can shift when markets become less predictable.

Start looking for investment opportunities in companies and sectors that have been overlooked by the bull market. Tomorrow’s winners are often yesterday’s losers, and if you can get in early enough, it may an especially rewarding ride up when a new bull market develops.

Invest in Niches That Are Resisting the Big Picture Trend

In any kind of market, even declining ones, there companies and sectors that resist the overall trend. For example, due to the Affordable Care Act in the US, healthcare stocks may continue to rise even in a weak stock market. There are hundreds of billions of dollars sloshing around in the financial markets, and it gravitates toward the niches that are most profitable. If you can identify those niches, and shift some of your equity capital into them, you may hardly notice the onset of a bear market.

Naturally, this isn’t as easy as it sounds. Since most stocks are market sensitive, they will fall in a general market decline. But certain niches will fall less than others, and may even present an opportunity to continue growing.

Keep Those Investment Contributions Flowing In!

This is where it becomes critically important to keep your emotions under control. When stock markets are rising predictably, it’s very easy to plow money into your investment portfolio. After all, each dollar you invest means more dollars later. When markets start taking wild swings, the heart grows faint and other spending priorities may suddenly see more important.

Don’t let it happen!

Since volatile markets often translate into smaller investment portfolios, one of the best ways to offset this is with fresh investment contributions. No matter what the markets are doing, continue to fund your investment portfolio – and even consider increasing your funding. This will be an excellent time to begin building up your cash reserves. You can invest your money in safe fixed income investments, that way you’ll have plenty of investment capital available when the markets stabilize, and there are plenty of bargains available.

Market volatility is never a sign to head for the hills, but rather to adjust strategy and to begin preparing for the next bull market.

The great thing about rising markets is that they are totally predictable – until they aren’t anymore. But when that happens, it will be too late to react with a comprehensive strategy. Volatile markets require advanced preparation; with the markets in record territory, this can be the perfect time to get started with those preparations.

1 Comment

  1. I think with DGI you do not have to worry about volatility. If you are in an accumulation phase volatility is your friend. Be buying cheaper!