For the past ten years, buying and holding has paid off well for stock market investors. In our current, uncertain times, the key principals investors have been operating under may be changing. In times of uncertainty, there are a few investment strategies and ideas that can serve to hedge an investor’s bets and alleviate the stress of volatility.
Right now, analysts and economists say we’re coming off of the longest bull market in history, which lasted from the 2008 financial crisis until 2018. Over the nearly nine-and-a-half years of growth, the major indices all posted impressive gains: The Nasdaq rose by over 500 percent, the S&P 500 gained by 320 percent, and the Dow Jones Industrial Average gained more than 350 percent. Coupled in with the Federal Reserve’s policy of quantitative easing and record low interest rates were the smart phone revolution, a maturing tech industry, and a recovering real estate market.
“A lot of this bull market has been driven by technology stocks,” said Dan North, who is the chief economist at Euler Hermes North America. “Tech is typically where you see some of the strongest growth and that’s where America competes very well.”
With the Fed moving towards a more normalized interest rate, an ongoing trade war, and the proliferation of algorithmic trading, volatility has been off the charts in both the broad market and individual stocks. For investors looking to ease their stress level, there are a few strategies tailored to Bear and volatile market investing.
The most extreme action you can take would be to exit the market entirely, selling off all positions. Doing this, you could then invest the money in other ways, whether it be buying short-term government bonds or real estate. If the market volatility is negatively impacting your life, it’s important to remember that there are many people who’ve gotten and stayed wealthy while investing in areas besides stocks.
The obvious downside to this is that you’ll miss out on any bounce back in the markets and your emotions could cost you money.
Buy Defensive Stocks
Another, much less extreme, strategy, is to shift your money towards what are known as “defensive stocks.” While tech stocks and other growth-focused sectors will often make headlines, and can make a lot of their shareholders wealthy, defensive stocks like utilities and consumer staples are the backbone of society and the financial markets.
“Utilities offering 6 to 8 percent total return with a lower level of risk might actually be a good place to be in an environment where volatility is rearing its head,” said Bank of America’s Savita Subramanian recently.
When investing in defensive sectors, you should always remember that dividend yields should be part of your due diligence and pulling out early on emotions or in the case of a market turnaround could cost you those anticipated returns.
Another, need-to-hear investment idea for volatility is to simply weather the storm. Selling off at a low-point, also known as capitulation in investment circles, will make you lose out on any potential returns in the long run and is a sign of investing based on emotions.