Tips on Investing in a Volatile Market
Market volatility is inevitable. But what is volatility, exactly? It’s the nature of the markets to move up and down over the short-term. Volatility makes timing the market extremely difficult, making it very hard to decide whether to buy, sell, or hold.
Many treat black swans (unforeseen events that shake up the market) as an opportunity to pour in investments. Some may treat it as an early sign to sell off before the market plunges.
An obvious example that comes to mind is the COVID-19 outbreak. Although it’s still up for debate whether this pandemic is truly a black swan event or not, it has no doubt caused a ruckus in the investment world. Many industries are severely affected already such as travel, luxury, and sports. It may take up months or even years before these industries fully recover.
With the pandemic and volatility still on the horizon, how can we, as responsible investors, toe the line of panic and market shrewdness? Here are some tips to keep in mind especially for an extremely volatile market such as the Philippine stock market.
Review Your Asset Allocation
The first thing to do is review your assets. Reviewing your investments gives you insights on whether to buy, sell, or hold it. The recent crisis makes you think of selling in order to have cash present for food and other necessities. After all, it is important to have cash nowadays because of the market and economic uncertainty.
After this, reassess your risk tolerance. Can you tolerate this kind of huge risk in a volatile market? If not, you may think of selling or adjusting to a more tolerable level.
Tip: Review your portfolio regularly. For short-term investors, it is good to review weekly or monthly. For long-term investors, you can do it quarterly or annually. Allot a day regularly to evaluate and assess your investments and the market.
Resist The Urge To Sell Because You’re Scared
During a pandemic crisis like this, investors are likely to panic-sell simply because they want to salvage whatever value left in their stock before it gets worse. While it is not necessarily the worst idea to sell stocks in a crisis like this, review it thoroughly first.
If your emergency fund is depleting, by all means, sell your stocks to have cash. Remember, emergency fund comes first. If you haven’t built one yet, now is a good time.
Learn more about Emergency Fund here.
Unless it’s for something crucial, do not sell. Especially if the stocks you hold are of good quality and are companies with good track records. Check if they’re poised to weather the incoming market storm caused by COVID-19.
Diversify your Portfolio
A silver lining of market volatility is record-low buy-in prices. Depending on how much cash you have, now might be a good time to diversify your portfolio and invest in several companies from different sectors.
A simpler way of investing is through a stock index fund, or equity index fund. These index funds consist of the top 30 companies. When the market recovers, it is highly likely that these companies will recover also.
Check out our Philippine Equity Index Fund.
Timing is crucial when buying stocks in a volatile market (especially in a pandemic crisis like this!) Buying too early may be dangerous especially if it’s a falling knife. However, when you buy too late, you may miss the low buy-in price and miss out on potential returns when the company bounces back.
Don’t Catch a Falling Knife
While it is tempting to buy today since the stock prices are cheap, be cautious not to quickly jump into a stock during a drop. You might have heard the term “Don’t catch a falling knife” because buying into a market with a lot of downward momentum can be extremely dangerous.
However, if timed perfectly, an investor that buys at the bottom of a downward trend can realize a significant profit as the price recovers. What you need to do is wait for the market to recover and see an upward trend. That said, there is a very real risk that the timing will be off and there could be significant losses before any gains.
Consider Peso-Cost Averaging Strategy
A tested strategy that you can do is the peso-cost averaging. In this strategy, you need to spread your buying over a long period of time on a consistent basis. This means that you should invest a portion of your money regularly in the long term.
This strategy works because you are investing an amount on a consistent basis, no matter how small it is. Compared when you are saving a lot of cash to buy stocks in one lump sum investment in the future, you will realize more investment gains if you start now. Remember, waiting could hurt your investment gains.