We are in for a bumpy ride in investment markets. These are the times when experienced investors make money while others lose. Being able to understand volatility and how to use it as an opportunity is a key skill that will bring financial rewards. It comes from being a confident investor who is prepared to see things objectively rather than being swayed by emotion. When markets are volatile, logic goes out the window for the fainthearted. When is the best time to buy shares? When prices are low, of course. Nervous investors buy at market peaks and sell in the troughs and then wonder why they have had a poor investment return.
It needs to be remembered that volatility is what creates investment return. Without volatility, there would be no gains. Over time, there are more ups than downs, resulting in a positive return in the long run.
There are four important principles to remember when investing in volatile times.
- Have enough cash on hand so you can ride out the market ups and downs. Then you won’t be in danger of having to sell at a loss to access your funds
- Have a fully diversified portfolio to reduce your risk and ensure your portfolio tracks the market index
- Invest in small, regular amounts over a period of time rather than investing in one lump sum. In this way, you can take advantage of market movement to buy at a range of prices and so spread your risk.
- Rebalance your portfolio on a regular basis. Your portfolio should comprise income assets (such as cash) and growth assets (shares). As the growth assets drop in price, buy more. When they rise in price again, sell some to maintain your desired balance between income assets and growth assets.