Title Tag: Tips to Invest in Uncertain and Volatile Market
Meta Description: Making Investment decisions can be a difficult task. Here are some tips to help you through an uncertain and volatile market. Read now!
Meta Keywords: Investment tips, Investment decision, Investment during volatility, investing during uncertainty, investment basics, market volatility, market volatility tips, market uncertainty tips, wealth management, wealth management solutions
Investing in an Uncertain and Volatile Market
Most investors, especially the novice ones, tend to panic when the market is going through a volatile condition. They start questioning their investment plans, and many of them end up making rash decisions. However, the truth is that volatility is a part of the market. It is in the nature of the markets to fluctuate considerably over the short-term. So, what an investor need is to understand the idea of volatile markets and have strategies to navigate the same.
With that being said, let us take a closer look at what a volatile market is and the steps to weather it.
Understanding the concept of volatile markets
Volatility is the statistical measure of the propensity of a security or market to fall or rise sharply within a shorter period. The standard deviation of the returns of Investment helps in measuring it. In simple words, volatility in a financial market refers to rapid and extreme price swings.
With an increase in the volatility in the market, the risk of loss and profit potential also increases. During times like these, there is a remarkable increase in trading frequency and an equivalent decrease in the duration for which the positions are occupied. Moreover, uncertain markets are also hypersensitive, as reflected in market prices.
Strategies for investing in volatile and uncertain markets.
Even volatile and uncertain markets can be weathered when the strategies you take are carefully planned. Though the steps you need to take in this situation vary according to the ongoing condition, given below are a few ideas that are tried and tested for market volatility.
- Cash accumulation
Range bound markets are not the right time for panic sales, but it is the right time for cutting back, especially for index investors. The market might have annual returns of around ten percent, but that’s an average at the most. However, it’s important to mention that the markets have reversed in numerous years too.
You might not have any idea about what future lies in store for the stocks, but you realize that being cautious is the best strategy of all times. Dumping stocks in a hurry will prove costly on a long-term basis. So, hold tight if you have a considerable stock position in the portfolio already. But, don’t forget to redirect your fresh contribution to cash equivalents.
Here are the two main reasons to raise cash while investing in uncertain markets:
- Raining capital for buying stocks when markets dip
- Shield a part of the portfolio from probable market declines
Holding on to the current stock positions will help you benefit from market upturns. However, you’ll get to increase the stock holdings by building the cash position if there is a market decline.
- High dividend stock
High dividend stocks are like your safety net in an uncertain market because the dividends are the cushion you need. Though the prices of underlying stocks might fall, you will still earn steady dividend incomes. However, the price will be stabilized by income.
At the end of the day, income is important when capital appreciation is not that certain in the market. Dividend income is reliable enough to lessen stock price decline and attract investors.
Dividend aristocrats are a group of stocks worth mentioning in this regard. These are drawn from the S&P 500, meet certain liquidity and size requirements, and contain at least twenty-five successive years of increase in dividends. It has generated annual total returns of about 15.5% vs. 14.3% for the S&P 500 during the course of the last ten years.
- Limit order
The order type you select is crucial when the market is uncertain. A market order always gets executed. However, in faster markets, you may be surprised at the price you receive, as that can be remarkably different from the quoted price.
Your best bet is to go for the limit order in a volatile market. A limit order is placed with the brokerage for buying or selling at a prearranged share amount, and better than or at a specific price.
It might cost a bit more compared to market orders, but these are always good to use in times of uncertainties as the price at which securities are sold or purchased by you is set. However, there is no guarantee of execution for a limit order.
Value stocks
Value stocks are historically known as one of the most fruitful ways to invest your funds in a volatile market. The basic concept here is that you need to identify the stocks that are bargains. It is generally because these companies are not favoured by general investors. Such companies have a lower value based on particular metrics that might include:
- A dividend yield that’s above average
- A price-to-book ratio that’s below average, or
- A price-to-earnings ratio lower than the industry-standard
These situations might arise due to a recent wave of bad news that has affected the stock value of a company. For instance, the company might have faced major lawsuits, negative media attention, regulatory action, or a long run of poor earnings.
Even after the events causing a drop in stock prices passes, the prices take quite a while to recover. Investing in such companies is one of the finest long-term investment plans you can implement because the stocks are cheaper compared to the competitors.
Investors are always ready to take the money somewhere else when the success rate of the high-end growth stocks no longer feels up to the mark. Considering value stocks has always been a feasible option in this regard.
Bottom line
Investors need to be completely aware of the potential risks they face at the time of volatile market conditions. Opting to remain invested can be a good idea if you have the confidence in your plans. However, if you decide to continue trading during an extremely volatile time, start by making a thorough assessment of how the market conditions can affect your trade.
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