Volatile markets are ones where prices move vigorously and unpredictably. Volatility is closely related to risk and to some degree, volatility is needed in an investment portfolio. The more volatile the market, the risky it will be to trade and invest. In the same breath, risk is tied to prospective returns. As an investor, it is important to be aware of your risk appetite and risk taking capability before making any financial decision. Risk appetite is defined as the level of risk you are prepared to accept in pursuit of its objectives before action is deemed necessary to reduce the risk. It represents a balance between the potential benefits and the threats that change inevitably brings.
Risk appetite is dependent on investment goals, affordability, your attitude towards risk and various other factors. Risk is not easy to measure, however ones emotional views towards risk is what determines their attitude towards risk. Conservative investors feel uncomfortable about losing money whereas aggressive investors do not mind taking risks. Having investment goals helps with minimizing risk because that way you are able to determine what it is that you want to achieve through the investment decisions you make. On the note of affordability, this critical element in making financial decisions is important to note because you would not want to tie yourself to something that will result in a loss. How you quantify your affordability is that you check what would happen if you would lose all or a portion of the amount in question. Know and understand the impact of the potential loss by assessing your current financial obligations.
The nature of markets move up and down over periods of time and so market volatility is inevitable. Timing the market can also be dangerous because market predictions can be deceiving at times. Therefore, it is important to have a long-term view for better returns as you can never really avoid short-term fluctuations. Some experts say that volatility in the market can be because of imbalance of trade orders (example all buys and no sells), some say it can be as a result of economic trends or releases, company news or even a recommendation from an expert analyst. Some also say that psychological forces cause volatility, which can be a change of mind by the investing community.
There are risk-easing strategies such as diversification where investors can enjoy some growth with less volatility. Concentrated portfolios may be risky at a time of volatility. One would rather look into creating a well-diversified portfolio that has the right mix of investment options that can withstand fluctuations in the market and assist in mitigating the impact of volatile markets. Consider your investment term; if you will need access to the funds soon or you will be going on retirement within 5 years, look into investing in less volatile stocks. There are also smart and innovative solutions such as smoothed bonus portfolios, which are investment options that are offered by life insurers that provide a guarantee on the money invested into the portfolio and the returns passed onto the investors in the form of bonuses stated by the insurer. Often times such portfolios offer partial guarantee. This investment option is more suitable for conservative investors as they are protected from negative returns and unpredictable markets, especially the current market that we have been in for the last couple of months. The aim of smoothed bonus portfolios is to provide a more steady growth and valuable guarantees on a portion of the capital invested and bonuses. Consider your investment costs and fees – this is another way you can hinder returns on your portfolio. Know what you are paying for.
Before making any financial decision, ensure that you gather all the necessary information. Check the facts of each option, follow market trends closely and diversify if you are able to. Predicting the future is impossible, however with the maximum data and information such as past performances, expert opinions, market trends, etc you will be able to make an informed decision. Sometimes constantly checking your portfolio can be discouraging especially in the economic climate and environment we are in currently. This can cause anxiety and we may feel the need to move things around or even withdraw funds due to the fear of losing the money invested. Have an investment plan because life happens – seasons change, lifestyles change, incomes change, preferences change, etc however note that it is equally important to do thorough research before making a financial decision.
(P.S Please note that this does not constitute as financial advice)
