(Newswire.net — August 30, 2020) — Some people love to see the stock market fluctuating wildly; they see it as an opportunity to take advantage of good deals and irrational prices. But for most investors, it’s troubling. When the stock market is too volatile, it can throw off the risk profile of your stock investments. It can also make it hard to gauge the best time to buy and sell, especially if you’re trying to manage a somewhat conservative investment portfolio.
So how should the average investor respond to these conditions?
Consider Other Assets
One of your best options is to flesh out your portfolio with other investment options. If you’re used to buying stocks almost exclusively, consider other investments like:
- Real estate. One of the best investment options overall is real estate, partially because there are so many ways for the average investor to get involved. For example, you can purchase rental property in your local area, collecting rent on a regular basis that results in positive cash flow, ultimately exceeding your total expenses. Over time, your property can appreciate, yielding an even bigger total return—and if you hire a property manager, you may not need to invest much time in the property yourself. Instead, you can let someone else handle it. Alternatively, you could consider investing in real estate investment trusts (REITs), which allow you to put your money in the real estate market more indirectly.
- Bonds. The classical complement to stocks, bonds offer a completely different investment structure. Generally, you’ll be able to capitalize on a stable rate of return of 1 to 5 percent, depending on the risk profile of the bond you’re purchasing. That doesn’t stand up to the long-term returns of the stock market in most conditions, but if stocks are volatile or if you want to balance your risk profile, they’re a great alternative.
- Precious metals and commodities. You could also consider other options, like precious metals or commodities. Precious metals like gold and silver tend to perform well when the stock market is tumultuous or experiencing a crash. Commodities, like sugar and oil, perform almost completely independently from the rest of the market. The big downside with commodities is that they tend to be even more volatile and unpredictable than the stock market on its worst days.
If you’re trying to stabilize your returns, make sure you select a mix of different options.
Practice Dollar Cost Averaging
Dollar cost averaging (DCA) is a commonly practiced strategy that helps investors minimize their risk while continuously investing in the stock market. The idea is to invest a fixed amount of money into a given asset or market at regular intervals. For example, let’s say you typically invest $26,000 per year. Dollar cost averaging would have you invest that money at a rate of $500 per week.
This way, some of your $500 chunks will be invested when the stock market is irrationally high. Some of your $500 chunks will be invested when the stock market is irrationally low. Most of your $500 chunks will be invested at “normal” prices. Overall, the cost averages out to something reasonable, and if you’re investing over a long enough time horizon, you’ll be practically guaranteed to see a return. Your risk of investing entirely at a peak is functionally zero.
Choose Broad Index Funds
Individual stock picks are rarely a bad idea, as long as you’ve done your due diligence, but if you’re not sure what the market is doing, a better bet may be broad index funds. Choose a fund that tracks hundreds, or even thousands of individual companies. You may also consider choosing index funds that provide a mix of both domestic and international equities.
Select an Industrial Sector That Isn’t Volatile
Certain market sectors tend to experience more volatility than others. For example, technology and financial stocks tend to be tumultuous whenever the broader market is showing signs or irrationality. However, other sectors tend to be more stable; utilities, for example, tend to retain a stable performance even during hard financial times. You can minimize your risk by focusing on industrial sectors that aren’t as volatile.
Collect Cash
Of course, if you’re very concerned about the stock market, you could always collect a fraction of your net worth to be held as cash. This way, you’ll retain a sizable chunk of liquid net worth that you can use to buy up equities whenever they seem to be both stable and affordable.
If the stock market is fluctuating wildly, try not to panic or make impulsive decisions. Instead, apply a rational strategy that allows you to stabilize your portfolio—or consider trying to take advantage of the rapidly fluctuating prices.