NAIROBI, Kenya, Jul 22 – It is very common to see investors panic into selling their stocks whenever shares or fund prices drop. Share prices fluctuate but what is inherently inevitable is stock market volatility once in a while. Investors therefore should treat market volatility as the norm and instead devise strategies to counter the effects of this volatility.
Intelligent investors are those who realise that volatile markets present buying opportunities especially for those who have long-term investment horizons. However, discipline is key as making regular stock purchases during lean times for the stock market is often difficult and virtually impossible for the light hearted who keep asking “is it the right time to buy?”
There are several ways of dealing with stock market volatility. However, at times it may be advisable to do nothing to reap the gains from making the investment worthwhile. One such strategy is cost averaging. This is particularly effective if the investor makes regular share purchases. Cost averaging simply means committing to a fixed amount of money at regular intervals to an investment. The investor therefore buys more shares when prices are low and fewer shares when prices are high.
This therefore means that the average cost per share may be less than the average price per share. This however involves discipline and the investor should not be swayed out of his or her commitment by falling share prices . A major consideration for an investor however is his/her ability to continue purchases through periods low price levels or changing economic conditions. It is also important to note that such a plan does not assure a profit and does not protect against loss in a declining market.
Another question investors often ask themselves during periods of volatility is “should I be more diversified?” More often than not, investors will need the help of their investment advisors to determine whether they have an adequately diversified portfolio. In line with diversification is the determination of whether your investment portfolio coincides with risk tolerance and your financial goals.
Another thing an investor could do to counter stock market volatility is to turn out the noise and go blind to the headlines. With so many opinions about the market during bear markets, investors are spoilt for choice and do not know who to listen to. Most headlines will paint a grim picture of the situation and reduce investor confidence in the stock market. In addition the media often provide a very short-term outlook. It will be important to ignore all the pessimistic views of economic analysts and experts and continue investing in the stock market. The fact is nobody knows for sure when stock prices will stop dropping and start rising.
Many experts agree and history is testimony that investors are better off ignoring stock market fluctuations. By resisting the temptation to make changes in their portfolio on the basis of short-term volatility, There are no real secrets to managing volatility. If your personal circumstances remain unchanged and you have a medium to long-term investment horizon, then it is advisable to “sit tight” through any periods of uncertainty.
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a turbulent market is to have a good long-term plan and a well-diversified portfolio.
But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. As always, to keep a balanced perspective, always call your financial advisor before making any changes to your portfolio.
(Renaldo D’Souza is the Marketing and PR Coordinator at Winton Investment Services Ltd, an Offshore Investment Advisory Company based in Nairobi)