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Navigating volatile markets – like we’ve experienced over the past few years and are in the midst of right now – is never easy, even for seasoned investors. The upside can feel great, but it takes patience, understanding and skill to steer through a downward market mood swing.
Yet investing in an unstable market can actually be a smart move that might prove advantageous for all investors. Temperamental markets offer not only the opportunity to buy stocks at a discount when prices have fallen but offer the potential for higher returns when stocks and funds go up in the future.
“It’s normal to feel anxious, but by understanding how to invest during volatile markets, you can turn uncertainty into opportunity,” explains Carissa Lucreziano, vice-president of financial and investment advice at CIBC.
“If you’ve been eyeing a particular stock that is overpriced, a market dip could be a chance to add it to your portfolio at a discount,” Ms. Lucreziano says.
“Investors who bought tech stocks like Apple, Amazon, and Google during the 2008 financial crisis and held them long-term saw huge returns over the next decade,” she notes.
“It doesn’t always work out that way, but taking the long view can pay off,” she adds.
How to benefit from market swings
Whether a beginner or a pro, every investor needs a long-term approach to weather skittish markets.
“When the market is down, some investors panic sell. Fear can shrink your perspective and make you focus on cutting your losses, but if you’re not pressed to sell right now you might be kicking yourself later if prices rebound,” Ms. Lucreziano explains.
It can be tempting to exit the market by selling and lay low while waiting for the market to stabilize. The challenge is knowing when to get back into the market if you sell. When investors sell everything, they often jump back in too late and miss the market’s recovery rally. “History has shown that those who stay invested during tough times often reap the biggest rewards,” she says.
Investors can do research. There are many good online articles that offer general information about how to start investing as well as online tools that can help calculate potential investment growth. When markets are down, it can be a good time for new investors with cash on the side to get into the market. There’s more chance for gains and less downside risk, as markets have already eased.
Look for strong companies with a solid history
In general, investors should buy into companies with strong fundamentals. “Look for a history of consistent earnings growth, a solid balance sheet and a competitive advantage in the industry,” Ms. Lucreziano adds.
“Consumer staples, like food and household items, and energy are usually more resilient in tough times. We all need to eat and most of us need electricity or gas to run our homes and cars.”
Exchange-traded funds, or ETFs, can be a good option in volatile times because they offer exposure to a broad range of companies without having to buy and monitor individual company shares. “This lowers your overall risk while still giving you potential to see gains if there’s a market upswing,” Ms. Lucreziano says.
Companies that pay dividends should not be overlooked either. Even when these companies’ stocks rise and fall in volatile times, their dividends still provide regular investment income that can cushion any blows as other parts of a portfolio dip.
“Don’t just pick something because it’s cheap – pick something that has good value for the price,” she adds.
Whatever you do as an investor, it can be helpful to talk to an advisor to get insights into investments that have good long-term growth potential.
Ensure your portfolio is diversified, especially if markets are shaky
Some stocks stand out because they look stronger than others, but it’s important to remember there are no guarantees in investing. It’s important to have a diversified portfolio, so that if a particular investment or sector hits a rough patch this can be balanced with different types of investments and different industries that can weather varying storms – particularly when markets are volatile.
“We’re riding some bumpy terrain right now, and a diversified portfolio is like a bicycle helmet for your portfolio – it could mean the difference between a scratch or a concussion,” Ms. Lucreziano says.
A diversified portfolio can include blue-chip stocks, guaranteed investment certificates (GICs), dividend-paying stocks, exchange traded funds (ETFs), mutual funds, real estate investment trusts, and gold and precious metals.
Another good risk management strategy is to deploy dollar cost averaging – buying more of a stock you already have when prices dip, so the average cost per share is lowered.
Is the 60-40 rule still relevant?
Tune into the Smart Advice with Carissa Lucreziano podcast for a conversation with David Wong, Head of Total Investment Solutions with CIBC Asset Management, as he shares insights on how investors can achieve a balance between stability and growth. Stream today on your favourite podcast platform.
Understand the risks and rewards
“Risk and reward go hand in hand but investing in a volatile market doesn’t mean you have to throw a ‘Hail Mary’ pass. It can pay to be patient and not get caught up in the hype. It’s not a bargain if it’s not something you really want.”
She recalls how legendary investor Warren Buffett once said, “It is wise to be fearful when others are greedy, and greedy when others are fearful.”
“In challenging markets, it’s even wiser to be clear-eyed,” Ms Lucreziano advises.
Advertising feature produced by Globe Content Studio with CIBC. The Globe’s editorial department was not involved.