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Whether you are new to investing or have been in the market for many years, you may feel a bit like you are lost at sea looking for a safe haven.
Investors are struggling with a confluence of market forces such as inflation, rising interest rates and the conflict between Russia and Ukraine. It’s an unfortunate combination of macroeconomic factors, combined with the fact that the world is still grappling with the effects of the pandemic.
Changes in the market have prompted many investors to look for portfolio strategies to navigate this market. While no one can accurately predict what will happen next, there are strategies investors can consider implementing to help manage their portfolios in the face of this volatility.
The starting point for every investor should be getting rid of emotions when investing. The main thing, of course, is to avoid making irrational investment decisions.
Market volatility, especially when it drives down asset prices, can be very emotional for investors. Recent discussions about the possibility of a recession have many investors haunted by 2008 (the great financial crisis) and 2020 (the start of the Covid-19 pandemic).
Fear often breeds bad investment decisions, so investors should try to pause and take a more analytical approach to evaluating their investment decisions. There is nothing wrong with changing an investment strategy or allocation as long as it is based on facts and not emotions.
As part of a more analytical portfolio approach, investors need to assess their current cash positions. Ideally, the investor should have enough liquid assets outside the market to cover living expenses for the next 12 months. Confidence that all current living expenses are covered can help investors not be emotionally and psychologically affected by market fluctuations.
Investors should also focus on a long-term strategy and should not lose interest in stocks.
It is not uncommon for investors to back out of investing in stocks after a hard time in the market. However, investors should not let the current volatility permanently close the door on stocks as an investment destination.
Instead, investors should remind themselves that despite a poor start to 2022, stocks are still the best source of long-term asset value appreciation. The current market offers the opportunity to make investments today that will provide income and profits in the future.
The investment portfolio should also be carefully reviewed to reflect changes in the market environment. This means doing some rebalancing.
The market took a more defensive stance; Quality companies with strong balance sheets and pricing are outperforming now and possibly in the future. As interest rates rise, fixed income and cash investments will have poor long-term real returns.
Investing a portfolio in companies that pay dividends is a great way to secure cash flow to help mitigate market volatility. Dividends are also more likely to be found in strong, long-lived companies that can act as relatively safe ports in a turbulent market. Investors should also rethink which sectors could be the beneficiaries of current conditions.
For example, one might conclude that finances would benefit from higher interest rates, or that health care stocks would be protected from inflation and interest rate concerns as long as demand for their products remains stable.
Finally, investors should not forget that taking tax losses from weak companies makes sense. These losses can be used to offset income from other investments and provide the necessary cash for an opportunistic portfolio reallocation.
Of course, the last few months have been difficult for every investor.
It is best to focus on your portfolio strategy and look for long-term opportunities in the market. Portfolio reorientation and revision is an important part of a successful investment process.