Good investing luck! 2024 has been a stress test for investors. Turbulent markets, recession fears and geopolitical concerns have all combined for a volatile environment that can make even the coolest investor skittish. But no worries, you don’t have to break a sweat. Play your cards right, keep your head and you’ll catch all the breaks that a turn like this one is bound to offer.
Understanding the Storm: Causes of Market Volatility in 2024
Market volatility is a normal part of the investment cycle, but some factors can exacerbate it. Here’s a glimpse into what’s contributing to the current market environment: Economic: There is some heightened concern about a global recession due to an expected decrease in economic growth next year. If growth is low, this could cause corporate profits to dip and hurt stock prices. Inflation and interest rates: With inflation running at multi-decade highs, consumers are seeing their purchasing power erode and fear that a period known as stagflation – whereby economic activity stagnates, while inflation soars – may be upon us. The Federal Reserve has signaled an aggressive plan to combat this inflation by raising interest rates, with the effect that borrowing to invest in a business expands. This can cause investors to fret, and even force down stock prices. (To learn more about market cycles, read our post ‘Investing basics: How to spot a market cycle’.) Geopolitical risks: international tensions and political instability can be destabilizing factors for global markets and business sentiment. Supply-chain interruptions, the threat of sanctions and energy supply issues can also have dramatic effects on the international markets.
Charting Your Course: Investment Strategies for Volatile Times
Here are some tips for calming the nerves while embracing the volatility. Remember, stable short-term pay cheques might sound nice, but a long-term returns mindset is your saving grace.
1. Keep your investments in check
2. Sit tight
3. Reassess your fund
4. Ask yourself
When am I likely to need the money? The more distant this date is, the more volatility you can afford. Diversification is King: Don’t put all your eggs in one basket!Don’t have all your money sitting in cash; put a portion in stocks such as the S&P 500, get some bonds, and a little real estate. Your portfolio will be much less likely to be affected by short-term moves in any one asset class (such as stocks or real-estate). Try alternatives like commodities, or infrastructure funds for more diversification.
**Dollar-Cost Averaging: **Your mother was right: don’t try to time the market! Buying the same amount of a diversified portfolio at regular intervals (such as monthly) effectively buys you more shares the lower the price, and fewer when prices are higher. As the prices fluctuate – often wildly – this ‘averaging out’ will provide the benefit of the swings of the market. More importantly, it is better than investing a lump sum because the price of the portfolio will never be as low as when you make your next investment. Value the Long-Term: If volatility in the markets today interferes with the long-term, meaningful objectives you have for your finances – for if for retirement or a child’s education – consider it to be a sure thing. Stick to your investment plan and don’t let market volatility tempt you to make irrational decisions. Markets are volatile but they have historically been subject to profound upward trends over the long term. (Learn more about how to build a resilient investment portfolio here. ‘Periodic rebalancing’: Rebalance your portfolio periodically, that is, if it strays from your original chosen asset allocation. For example, let’s say you have been fine with your current portfolio for a very long time: it’s been soft and gentle, and your watering and fertilising regime has been just right. But then the markets have gone on a rampage and your portfolio is now entirely made up of pitch pine.
Beyond the Basics: Advanced Strategies for Volatile Markets**
For the intrepid investor looking for even more options to navigate the choppy waters of the equity markets, here are some of the more complex strategies available: Options Trading: While options contracts can be used to hedge current positions or earn income, options trading as a profession is a challenging and risky enterprise requiring specialized skills and approaches to effectively understand the nuances of a variety of options strategies. Consult your licensed financial professional. Tax-Advantaged Accounts: Regularly maximize the use of all your available tax advantaged accounts, including IRAs and 401(k)s (if available), so you can take advantage of tax-deferred or tax-free growth on your investments, which can compound over time and help you ride out market volatility. Socially Responsible Investing (SRI) – If toxic business or political practices bother you, then take a close look at Socially Responsible Investing (SRI), which is designed to address that. SRI works by buying stock in companies that reflect the social and environmental values that you believe in and/or supporting the underlying social purpose of the company, such as by purchasing have to start somewhere, and everyone’s threshold for company practices that don’t ‘sit well’ with them is different. Your goal may be to only buy stock in companies that scored an ‘A’ on an Oxfam rating, or you may consider ‘sin funds’ unacceptable because you believe industry standards are too lenient. Whatever your threshold, a focus on SRI might be both personally satisfying and help you beat the market in periods of economic turbulence.
Seeking a Skilled Navigator: The Value of a Financial Advisor
A qualified financial advisor can be a helpful partner to you as you traverse the both rocks and potholes of the turbulent market scenarios in the following ways: Design A Portfolio For Your Investment: Based on what kind of risk you can bear, what your goal of investment is, and what your investment time horizon is, a target financial advisor will make a portfolio for you to design what you need. Have a good loss management strategy: Risk management can be handled through sane investment strategies, such as allocated across asset classes, stop-loss orders (when you instruct the person managing your securities to sell things if they get down to a certain level), and diversification, say, across sectors or geographic regions. Financial advisors have a variety of insurance policies (see picture below) that you can have in your portfolio to manage losses.
