Strategies to use when investing in uncertain environments

The Australian share markets this week experienced some volatile days. Primarily this was due to the leadership spill with the Liberal government. The previous week we saw the market being nervous with the trade wars between Turkey and the United States. What is clear is that the market does not like uncertainty. It reacts in fear and there can be a lot of fluctuation in share prices. These are the strategies that investors turn to in uncertain times:

1. Don’t panic and sell your stock

Leave investments as is until volatility passes. Market downturns are normal but usually do not last for long. Do not trade on emotion and sell which will crystalize your losses.

2. Buy when the market is down

Purchase more stock when the price is low, downward volatility can present good entry points for investors who think the markets will perform well in the future. Fear in the markets offer good opportunities to buy attractive stocks at cheap prices.

3. Stay diversified

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. Investors should also think about adding international stocks to their portfolio as the ASX only represents 2 per cent of the world’s market capitalisation.

4. Invest in quality companies

In uncertain times, investors should look at quality companies with healthy balance sheets. Stock prices of quality companies are unlikely to be as volatile.

5. Avoiding expensive stocks

Stocks which are overpriced in an uncertain market will correct. Hence it is best to avoid expensive stocks in these conditions. As per the point above, invest in quality companies.

6. Realise some profits in the portfolio

Cashing in profits is a good strategy in an uncertain market as it raises cash for the portfolio.

7. Invest for income

Buy income producing stocks when the market is uncertain. This is because the cash dividend is yours regardless whether the stock price is rising or falling.

8. Invest in defensive stocks

Utilities, healthcare and consumer staples are good sectors to invest in during market uncertainty.  It doesn’t matter what is happening with the stock markets or how weak an economy is, consumers will still purchase products and services in utilities, healthcare and consumer staples.

9. Decrease your holding in emerging markets

The emerging markets are riskier than developed ones so in times of political instability, stocks in these markets will be slammed. Investors should think about reducing their stocks in emerging markets during uncertain market conditions.

Lauren Hua is a private client adviser at Fairmont Equities.

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