5 Ways to Capitalise on Market Volatility (+2 bonus ideas)
Global markets are currently reeling from the impacts of extreme financial volatility. The VIX, known as the “fear gauge,” has shown a significant increase in recent days, signalling heightened market anxiety and volatility. A mix of factors has triggered a wave of panic selling, causing indices to plummet into the red before dramatically rebounding, exposing investment portfolios to severe risks and uncertainty.
In these volatile times, the key to not just surviving but thriving involves adapting investment strategies to harness potential opportunities even in a volatile market. Here are the top seven strategies to help you balance your portfolio effectively:
1. Dollar-Cost Averaging: Your Steady Hand in the Market
Dollar-cost averaging (DCA) is a strategy that helps investors reduce the impact of volatility by spreading out their stock or fund purchases. By investing a fixed amount regularly, regardless of the share price, you can buy more shares when prices are low and fewer when prices are high, effectively lowering the average cost per share over time. This method disciplines the investment approach by removing much of the emotional decision-making associated with timing the market and builds the portfolio steadily and surely.
Example: Imagine you invest $100 in a stock every month. If the stock price is $50 in the first month, you buy 2 shares. The price drops to $25 in the second month, so you buy 4 shares. The price goes up to $33 in the third month, and you buy about 3 shares. Over three months, you’ve invested $300 and acquired 9 shares at an average price of about $33.33 per share.
2. Investing in Defensive Stocks
Defensive stocks belong to sectors that typically perform well during both economic contractions and expansions because they produce or offer goods and services that remain in constant demand, like utilities, healthcare, and consumer staples. For instance, no matter the economic condition, people will still need utilities and basic household goods.
When selecting defensive stocks, look for companies with a history of stable earnings, strong balance sheets, and consistent dividends. Some examples of defensive stocks include Merck, UnitedHealth, Colgate, Johnson and Johnson, Walmart, Pepsi, Conoco Phillips and Occidental.
You can also trade on our Green Energy index, or the Energy Select Sector SPDR ETF which gives alternative ways to gain exposure to many leading energy companies in one basket.
3. Corporate and Government Bonds: The Traditional Safe Haven
In times of stock market turmoil, bonds can act as a sanctuary. They generally offer lower returns than stocks but come with sometimes reduced volatility and risk, providing a potentially steady income stream through interest payments. Government bonds, in particular, are considered a safe haven due to the very low likelihood of a country defaulting on its debt. Incorporating a mix of government and high-quality corporate bonds can provide a buffer for your investment portfolio against the rough seas of stock market crashes. Discover the available corporate and government bonds you can trade through one of TrustPilot’s top-rated brokers here at AvaTrade.
4. Safe Havens: Gold and Other Alternatives
Gold has historically been seen as a hedge against inflation and currency devaluation, often appreciating during times of economic instability. As stocks and bonds take a hit, gold and other precious metals can retain value or even appreciate, providing a non-correlated asset that stabilizes your portfolio. Other alternatives like silver and ETFs can also offer stability. It’s worth noting that while crypto is sometimes seen as a safe haven, it doesn’t always align with ‘risk on’ assets, as evidenced by recent market meltdowns where cryptos have sold off dramatically.
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5. Exploring Short Selling: Try to Profit When Markets Fall
Short selling with CFDs allows you to sell stocks or other assets when their value is falling and by them back when they are rising again, which is a major benefit of CFDs. With AvaTrade, you can easily short sell throughout the trading day using leveraged CFDs in a regulated and secure environment.
6. Lowering Leverage: A Prudent Approach to Market Fluctuations
During periods of heightened market volatility, managing your leverage becomes critical. Leveraging, while a powerful tool for amplifying returns, also increases the potential losses when markets move against your positions. In a downturn, reducing leverage can safeguard your capital by minimizing potential losses. With us, you can adjust your leverage settings to suit changing market conditions. This strategic reduction helps maintain control over your investments and reduces the risk exposure during uncertain times. By moderating leverage, you ensure that your investment strategy remains robust, even as market dynamics shift.
7. Mastering Risk Management: Your Safety Net in Turbulent Times
Navigating heightened market volatility isn’t just about seizing opportunities—it’s also about protecting what you already have. Effective risk management is your safety net when the financial weather turns stormy. It involves setting up measures like stop-loss orders to cap potential losses, diversifying your investments to spread risk, and keeping a vigilant eye on market trends to adjust your strategies promptly.
Using tools available on our platforms can significantly ease this process. Features like customisable stop-loss options and real-time market alerts help you manage your investments proactively. By prioritising risk management, you not only shield your portfolio from severe downturns but also maintain a solid footing, ready to step forward when conditions improve.
Final Thoughts
Navigating a market downturn requires a blend of strategic adjustments and nerve. By employing these seven strategies, you can seek to not only shield their portfolios but also position yourselves to try to take advantage of unique opportunities that arise during volatile times.
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