Stock Market Up And Down – How To Protect Yourself From Market Volatility?
Table of Contents
Introduction
Volatility has appeared to wreak havoc on the stock market recently. If history indicates, next year will bring about significant improvements.
Despite increased investor engagement in the stock market in recent months, market volatility continues to be a major stressor. The average Volatility Index (VIX) reached 19.95 as of 7th Nov 2022, leading many retail investors to hesitate and slow down their investments.
Investors frequently find market volatility worrisome, which forces them to adjust their investing strategy. However, volatility is a central aspect of investment. With the appropriate strategy, embracing this market dynamic can help people weather turbulent periods and continue uninterrupted financial paths.
What factors affect stock market prices?
One must remember that to invest in stocks, a Demat account is required. Moreover, there is a difference between Demat and trading accounts.
Generally, stock prices are affected by three main factors in the long run: earnings, dividends, and supply and demand.
One of the essential factors affecting stock prices is a company’s earnings or fundamentals. When a company reports strong earnings or has strong fundamentals, it is usually a good sign for the stock price. On the other hand, weak earnings or declining fundamentals can lead to a decline in stock prices.
Another essential factor affecting stock prices is dividends. A company’s dividend announcement is often good news for the stock price.
The final factor affecting stock prices is supply and demand. The
is a lot like any other market – when there is high demand for a stock, the price increases. Similarly, when there is low demand, the price goes down.
Other factors that impact stock prices are Government policies, interest rates, inflation, geo-political events like war, etc.
How can investors guard themselves against market volatility?
Investors can guard themselves against market volatility through the following strategies:
1. Stay diversified
Portfolio diversification is the greatest way to safeguard one’s money against market cycles.
Investor’s risk exposure may be maximised, and any potential losses from volatility can be countered with a healthy mix of fixed-income and equity assets. To stabilise the portfolio, particularly during volatile market periods, investors may want to consider diversifying among several market sectors, asset classes, or a mix of both. Investors can also invest in US stocks from India.
2. Stay invested for a long term
Stock prices tend to vary significantly during uncertain market conditions, which tempts many investors to engage in short-term trading. However, traders must have a firm knowledge of the market intricacies to make trading profitable.
Thus, investing with a long-term view is more advisable for investors with little experience in the market.
Moreover, investors can weather short-term uncertainty by maintaining their investments over the long term without putting them at risk, as volatility is temporary.
3. Stick to the plan
Many investors give up on their financial goals-based strategies and start trading when the market exhibits unpredictable behaviour. However, over time, this can hurt their progress as an investor.
While making any investment choice, investors can use their original strategy as a guide. As long as they do not cause their portfolio to become unstable, they can take advantage of market changes helping them reach their financial objectives.
4. Avoid jumping in and out of the market
Since successful market timing entails exiting at the right moment and re-entering at the appropriate time, it is exceedingly challenging. Thus, one can avoid jumping in and out of the market and focus on long-term investment.
5. Consider including defensive assets or stocks
When equities are down, defensive assets like cash and cash equivalents, Government bonds, and Treasury securities can help keep a portfolio steady.
Moreover, defensive sectors, such as healthcare and consumer staples which are relatively unaffected by economic uncertainties, can also be added to the portfolio to reduce the risk. In times of uncertainty, they could even outperform the market.
6. Rebalance portfolio
Reviewing the portfolio’s asset allocation at least once a year is a recommended habit. Market corrections are an excellent time to get to it if it has not been done in a while.
When an asset class experiences unusual gains or losses, it is wise to rebalance the portfolio for financial well-being. Rebalancing a portfolio, to put it simply, is the process of adjusting for deviations from the initial allocation.
Conclusion
Bullish and bearish market phases are common since the market operates in cycles. Volatility is the norm; therefore, it is always a good idea to have a plan of action in place that will enable anyone to carry on with their investing endeavours despite market turbulence.
