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Weathering the Storm

Strategies for surviving stormy stock markets


During periods of stock market volatility, the common wisdom is to sit tight and wait for it to pass. For the most part, that’s good advice, especially when your investment portfolio is properly designed to weather volatile markets.

By Allan Morse


However, given the magnitude of the current financial crisis, many people are starting to wonder if there’s something they should be doing. And, depending on the situation, there could be. Following are some key strategies to help you make sure your investments are correctly structured for today’s volatile markets.

 

Take a rational look at your investments


So far you’ve resisted the urge to sell everything and stuff your money under the mattress. Now’s not the time to start second-guessing yourself. But it is time to take a rational look at your investments to ensure they’re still right for you. Market volatility can be very indiscriminate, affecting good, bad and indifferent stocks. The key is determining which stocks are most likely to bounce back when the volatility abates – and which ones aren’t. Volatility can expose underlying weaknesses in certain stocks, which were previously buoyed up by generally positive markets. Even when the market volatility settles down, these stocks may take a longer time to recover – if they recover at all. On the other hand, stocks with strong underlying fundamentals are more likely to recover quickly and continue growing.


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Regard it as a buying opportunity


Normally when something goes on sale, people regard it as an opportunity to get a good bargain. But when stocks go on sale, people tend to shy away or even sell what they already have. Regard stocks like you would anything else that goes on sale. If they’re on sale because there’s a problem, don’t buy them. But if they’re on sale simply because there’s a sale, consider buying. It could be an excellent opportunity to buy something with a higher intrinsic value at a temporarily lower price.

Review your level of diversification


You’ve heard it before and you’ll hear it again - diversification is the key to reducing risk in your portfolio. The idea is simple – you invest in a variety of different types of investments, so that if one investment goes down, you don’t lose your shirt. But how you diversify can be quite complex. Beyond the tried-and-true technique of diversifying by asset class (stocks, bonds and cash), there are several other techniques. You can diversify by geographic area, industry sector and investment style - just to name a few. What’s more, diversification isn’t a one-time thing. Especially during volatile markets it’s important to stay on top of it, as moving markets can shift your asset mix too heavily in one direction or another. Everyone has an optimum level of diversification determined by their comfort with investment risk, their growth and income requirements, the amount of time they have to invest and other factors. Maintaining this optimum level requires constant adjustments - particularly when markets are in flux.

Reassess your own comfort with risk


The stock markets climbed steadily from 2003 to reach record highs over the summer, lulling many investors into a false sense of security. It’s easy to become complacent about investment risk when the markets are well behaved, leading many investors to overstate their true risk tolerance and choose a more aggressive investment strategy. Then, when the markets go into a period of volatility, these investors find themselves suddenly uncomfortable with the risks they were perfectly comfortable with before (when the markets were going up). If you’re feeling uncomfortable about the current volatility, it may be a sign that you should take an honest look at your real risk tolerance and possibly adjust your investment strategy so you can get a good night’s sleep.

 

Keep your investment plan up to date


Think long term. Stay the course. Stick to your plan. These commonly prescribed remedies for market volatility all sound good in theory, but what if your plan needs to be changed? Investment plans do need to be updated regularly, not only as market conditions change, but also as your personal circumstances and goals change. You should review your plan at regular intervals and whenever there’s an important life event, such as starting a new job or business, changing your marital status or receiving an inheritance.


Allan Morse is Vice President and an Investment Advisor with RBC Dominion Securities Inc. in Charlottetown, PEI. Member CIPF. Allan can be reached at 1-800-463-5544 or at allan.morse@rbc.com. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Hold on, you won't believe what will happen in the next five years. If Management has not stayed ahead of the wave, then he/she is currently under a great deal of business stress.  

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