Stock markets have seen some very wild movements in the last few weeks. Here are some common strategies to implement when the stock market may head lower.
1.Move some positions to cash
When the stock market is very volatile, it might be prudent to move a portion of your portfolio in cash. Any capital invested in the stock market is capital put at risk. Therefore, to eliminate some risk move some of it into cash.
2.Keep an eye on stocks with a high P/E ratio
When there is overall market fear, stocks with high P/E will be sold down. Companies which are expensive, i.e. their stock prices do not reflect their intrinsic value, can often be first to be cut. Investors/traders will see these as being too risky to hold in a volatile market. The risk is that as these stocks are already overvalued, there is a possibility the stock will have a large sell down.
3.Keep good quality stocks
During the share market sell downs, good quality stocks often decline in share price but not as much other riskier stocks. Investors who want to keep some market exposure can often keep these positions despite the market volatility as their falls may not be as significant. The quality stocks should be the first ones to head up when the market recovers.
4.Keep defensive stocks
Defensive stocks tend to fall less when the stock market is fragile compared to other stocks in the market. When the stock market is in panic mode, defensive stocks tend to react less than the others. If you want to keep some exposure to the market while reducing possible downside, then defensives are one way to do it.
5.Watch stocks with high beta
Stocks with a high beta move much more than the market. That is, stocks with beta which are above 1.00 means that they will potentially move more than the market, and stocks with a low beta will move less than the market. Therefore, in situations when there is a global sell off, high beta stocks are the first to fall the most.
Diversifying your portfolio can reduce the effects of volatility. Investing in different sectors can assist investors in riding out the wide market movements during uncertain times. By spreading your investments, you are reducing risk as the chances of your losing your whole portfolio is decreased. If one sector on your portfolio is not performing well than another sector may be doing well.
Lauren Hua is a private client adviser at Fairmont Equities.
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