2018 has been characterised by volatile markets.
It has not been uncommon to see stocks plunge more than 10% in a single trading session. The market as a whole has also swung wildly, with 1% single-day swings commonplace this year. Interest rate hikes, trade conflicts and world events like Brexit have all been big contributors to the erratic market. So how can investors protect themselves in a time of extreme volatility?
Dollar cost averaging
The dollar cost averaging strategy involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. For instance, if we have allocated $10,000 to purchase a stock, instead of buying it all at one go, we can buy one-third of the amount each month over three months.
This will reduce the risk that a sudden drop in share price will have an adverse impact on our stock holdings.
While the dollar cost averaging strategy may not be so appropriate in raging bull markets, it can help reduce risk in a period of uncertainty and volatility.
Diversify your investments
Diversification is one of the most critical aspects of constructing a portfolio. It is essential that investors spread their portfolio across a range of asset classes. This can include investing in stocks, bonds or real estate.
Investors should also ensure that they diversify their investments within a single asset class. I recommend that an investor’s stock portfolio include at least 15 different companies across a wide range of industries.
Personally, I try to ensure that each stock does not take up more than 5% of my portfolio.
Finally, investors should have the long-term mindset when it comes to investing. Market volatility can impact the short-term value of your portfolio, but if you have a long-term plan and buy companies with strong fundamentals, it is more likely than not that its share price will follow its business growth into the future.
As a long-term investor, I am not overly concerned by short-term fluctuations in price and will happily hold on to my stocks as long as the fundamentals are still strong.
The Foolish bottom line
2018 will perhaps be a year that is remembered for the volatility of the stock market. However, investors should not fear market volatility.
By thinking long-term, diversifying our investments and using a dollar cost averaging strategy, we can cope with volatility and ensure that we continue to prosper, even in times of uncertainty.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.