The volatility in global stock markets over 2022 so far is enough to shake the conviction of even the most grounded of investors. Here are a few strategies I’ve been using to ride out the storm.
1. Don’t panic-sell
When the chips are down, it’s easy to see why moving into cash is so appealing. It draws a line under the situation and allows me to move on. But does it really?
Beyond holding an ’emergency fund’ to cover, say, a sudden unexpected bill or brief period of unemployment, cash is just about the worst asset I could have right now. Low interest rates and galloping inflation means its value is gradually (or not so gradually!) being eroded. So in addition to crystallising any losses, I’d essentially be jumping out of the frying pan into the fire.
Selling up also implies that I also know when will be the right time to buy stocks again. The sheer volatility we saw on markets last week, where share prices actually rose as the Russian invasion of Ukraine progressed, tells me I don’t.
As a committed Fool, it goes without saying that panic-selling everything I own right now is not something I’m contemplating.
2. Buy quality
Warren Buffett tells us to “be greedy when others are fearful“. I’d say right now offers me a great opportunity to put this advice into practice.
Now, it doesn’t make sense to buy any old stock on the market and expect it to recover in style. I would, for example, avoid any company lacking financial stability (such as cinema chain Cineworld). I would also steer clear of any business that lacks an identifiable advantage over competitors (such as white goods seller AO World, in my opinion). Instead, I’d be out to snap up proven ‘winners’ in their respective sectors. From the FTSE 100, for example, I remain convinced that Halma is a great growth buy.
Aside from looking for quality businesses, there are also ways of making the buying process easier from a psychological point of view. One is buying in tranches, otherwise known as pound-cost averaging. Such a strategy helps to avoid trying to time the market exactly (which I know I can’t do, at least consistently). It also ensures at least some of my money starts working for me.
A third element of my buying strategy is to make sure that anything I snap up is held within a Stocks and Shares ISA. This means any profits I make (and dividends I receive) are free of tax.
3. Switch off
Assuming I’ve not sold anything in haste and bought things I’ve had on my watchlist, there’s one final solution that’s unsurpassed in helping me deal with stock market volatility. Simply, just switch off. That’s right — close off my portfolio, turn off the laptop, stop watching the news and go and do something more productive.
I have the confidence to do this because evidence shows that equities outperform all other asset classes. This includes cash (naturally), bonds, real estate and gold. The only caveat here is that this requires being invested for the long term.
For someone content to grow his wealth slowly but surely, that suits me. As distressing as current events are, I also know that “this too shall pass“.
