The stock market can be very turbulent at times. Here are some of the tips for investing during stock market volatility and our Qplum review.
Qplum Review: Reduce Risk During Stock Market Volatility
Stock investments are great when markets are doing well, and risky when they’re not. The price of stock tends to move with the market, and there’s only so much financial planners can do to navigate this.
During volatile times, the majority of investors get frightened and begin to question their investment strategies. This is common with new investors, who often get tempted to pull out of the market altogether and wait on the sidelines until it appears safe to dive back again.
The volatility also keeps firms from putting up public stock offerings which creates negative undercurrents for the general economy.
As a dividend growth investor, I’m focused on the long-term. Day to day fluctuations really don’t affect me. However, you must prepare for risk or downside at any point in time, which is why I like writing covered calls. Also, when volatility is high, you can sell weekly puts for income as the options’ extrinsic value is usually high.
So, what is stock market volatility?
Volatility is a numerical measure of the market or security price tendency to rise or fall sharply within a short period. It is usually measured by the standard deviation of the return of an investment. Standard deviation is a calculation of variation or deviation that might be projected.
Wide price fluctuations usually characterize volatile markets, and heavy trading caused by an imbalance of trade orders in one direction, for example, all buys and no sell.
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The primary causes of the stock market price fluctuations
Often, stock prices are volatile when something out of the ordinary happens. Some of the most common reasons for a shake-up in the stock markets are political developments, economic indicators, company news, a popular initial public offering, unexpected earning results, a recommendation by a famous analyst and public relations disasters.
A different school of thought believes that volatility is as a result of day traders, short sellers and institutional investors.
It’s obvious that every investment carries risk: liquidity risk, market risk, political risk, inflation risk, currency risk, legal risk, operational risk, interest rate risk, capital risk, counterparty and concentration risk and more. These risks threaten investors, influence their trading behavior, and ultimately cause fluctuations in the stock market prices.
If it were possible for investors to predict significant market swings on a regular basis, the investment community would be chock full of millionaires.
Investment advisers and savvy investors consider different factors and develop models to evaluate the impact of potential swings using the historical occurrences of the stock market.
Political and economic instability is said to impact some stocks more than others, while essential court rulings or federal grants factor more into the market volatility of a single stock sector over others. Tracking patterns helps investors make better predictions for stock purchases.
Another explanation of volatility is that psychological forces cause investor reactions to the stock market. This theory is proof of the efficient market hypothesis (EMH), a concept that states that market prices are correct and adjust to reflect all information.
The behavioral approach by investors’ implies that substantial price fluctuations result from a shared change of mind by the public. There is no clear consensus on what causes volatility, but, since volatility exists, it’s essential to develop strategies to deal with it.
How to invest during a volatile stock market
So, how can investors keep from panicking every time market volatility strikes? Over time, investors have created many strategies to deal with market ups and down:
Invest and ignore price fluctuations
An important thing to know when you decide to invest in that volatility comes with the territory. The stock market will always have its swings. So if you’re a long-term investor, it’s ideal to make investment decisions based on your timeline and risk tolerance. As an investor, you should also seek out value stocks in the market to protect your downside. Check out dividend stocks infographic on how to find undervalued stocks.
Don’t be an investor with a herd mentality. Yes. I know it’s hard to stand by and watch your portfolio take unexpected hits during a bear market. But sometimes, it may be a good strategy.
After that, do proper research, or at least get to know the rationale of your investment, so that you are aware of the risk you may be taking before you act. Being an informed or evidence-based trader/investor will help you to reduce risk.
If you find a company with a strong balance sheet and consistent earnings may not be affected by short-term fluctuations. Periods of high volatility can be opportunities to dive in and buy, then hold and wait to make money in the long-run.
Continue to dollar cost average through fractional shares investing. This is why I love fractional shares.
Some investors manage risk with a hedge. Hedging is a risk management strategy used to limit or offset the loss from fluctuations in the price of securities. Traders and investors who have large portfolios manage risk with a hedge. They use derivative instruments like options.
Trailing stop loss
Another way for an investor/trader to manage risk is mainly to avoid the potential loss of profits. Trailing also called progressive stops are perfect because if the stock continues trading in an uptrend over time, the price gets further higher and higher from the point of entry and, at some point, it becomes necessary to protect the profits and prevent them from getting eroded away due to sudden reversal or unexpected volatility.
Perhaps one of the most popular strategies for handling volatility is portfolio diversification. You can choose an ideal asset allocation for your portfolio. By allocating your money out over various asset classes, you’re also diversifying your market risk, This helps ensure your portfolio’s results don’t depend on the performance of a single asset.
Make sure you have a mix of good quality of stocks in your portfolio. It is vital to include stocks that are essential for example stocks that provide good liquidity and are relatively less volatile. Stick with stocks that ensure good liquidity, better spreads, and measurable volatility.
Regardless of the investment strategies used, every investor needs a prudent risk management strategy. This is the most efficient way to have a proactive plan for market swings to mitigate risk. Consider diversification if you want to deploy the mega backdoor Roth IRA.
Qplum financial advisers help their investors navigate the market volatility with confidence by implementing a 2-tier approach to risk management: systematic risk management and risk targeting. Let’s get into our Qplum review on how to reduce risk during volatile markets.
Qplum Review: How to Help Investors Reduce Risk
What does Qplum do? Qplum advises investors on how to diversify the portfolio and manage their risks. Investors can choose their risk tolerance which can range from conservative to aggressive, and then the A.I. powered system creates a customized investment portfolio with low-fee index funds and then re-balances it frequently based on market conditions.
The two primary levels of defense mechanisms that Qplum use are risk targeting and risk management.
Risk Targeting is the process of adjusting your investment portfolio so its expected risk remains within a range. No matter the market conditions. Qplum portfolio-level asset allocation strategy involves choosing an ideal asset allocation that adheres to the risk mandate for the portfolio.
In addition, Qplum portfolio targets a specific fixed percentage of risk and can contain the realized risk within a reasonable limit without fluctuations. Qplum uses risk targeting as the first strategy to eliminate risks because of its potential to generate more returns.
When risk targeting isn’t enough to reduce risks, Qplum makes use of a risk management strategy. Risk management is a plan to enter and exit the market during periods of extreme volatility and helps investors navigate the volatility without fear.
The two significant benefits of risk management are capital preservation, and investors do not need to do market timing when making investments. An investor who has a systematic risk management strategy in place can still make money even during volatile times.
Conclusion on Stock Market Volatility and Reducing Risk Through Qplum
It’s important for investors to have a risk management strategy in place to survive the ups and downs of the stock market and to get good returns when the market stabilizes. Qplum helps investors have risk targeting and risk management strategy in place to protect their portfolio during periods of high volatility.
People don’t realize the risk they take as equity investors in the capital stack. Here’s how I conduct capital structure analysis to ensure I’m aligned from a risk perspective from the get-go.
What ways are you investing during stock market volatility? What do you think of our Qplum review? Let us know in the comments below.
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