Australian share markets have recently seen a spike in volatility due to fears over Coronavirus. No-one knows exactly how it can play out from here. Outside of complicated hedging strategies, there are some basic actions that the average investor can take to minimise their downside until the dust settles.
1.Get in to Cash
When the stock breaks its uptrend and becomes volatile, it can be best to move a portion of your portfolio in cash. We wrote an article recently about stocks to offload during the coronavirus to reduce risk in a portfolio. Stocks with high beta and stretched valuations should be considered as investors can only protect their capital when they expose less of it to the market.
2.Sell small cap stocks – riskier stocks
In conjunction to high beta and high P/E stocks, traders should think about selling small cap stocks as these will also see huge swings down. However, if investors have a long-term view of their investments, then they can ride out the volatility and may want to hold them. There may be also be a liquidity issue with small caps during panic selling. That is, there may be a lot of sellers but not many buyers. This will cause issues for an investor with a large holding who wants to liquidate which could drive the share price down even further.
3.Keep good quality stocks
During the share market sell off, the good quality stocks such as CSL have also declined in share price but not as much other riskier stocks. Investors should consider keeping these positions despite the market volatility as their falls may not be as significant and investors may risk getting back into the stock at a higher price once the market bounces back. The key is that the quality stocks are the first ones to be scooped up when the market recovers, not the dogs of the ASX.
4.Keep defensive stocks
Defensive stocks tend to perform better when the economy is fragile compared to other stocks in the market. When the stock market is in panic mode, defensive stocks tend to fall less. This means that if you wish to keep some exposure to the market while reducing possible downside, then defensives are one way to do it.
5.Monitor stop losses
In periods of volatility investors should think about implementing stop losses. If the stock goes pass a stop loss level in a volatile period, investors should think of about exiting the position to avoid further capital erosion.
Lauren Hua is a private client adviser at Fairmont Equities.
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