Volatility has been a recurring stock market theme over the last couple of years. First the pandemic came along, followed by inflation. Today, economic conditions are improving. Yet higher interest rates, political uncertainty, and international conflicts are keeping investors on edge.
However, while navigating volatile markets can be frustrating, it also can create some exciting opportunities. And if executed correctly, investors can use these price fluctuations to supercharge their long-term returns.
Capitalise, diversify, defend
In the short term, stock markets can be pretty erratic. Investors panicking to protect their wealth often send stocks into the gutter, including the good ones. We’ve seen this countless times where something goes wrong, and terrific companies that are unaffected still get sold off en masse.
It’s hardly a pleasant experience to endure, especially when these top-notch stocks are in my portfolio. However, taking a more ‘glass-half-full’ approach, these situations also create buying opportunities. After all, if the underlying business is still chugging along nicely, a falling stock price is like seeing a discounted special offer in the supermarket.
Being diversified is also quite prudent. By spreading capital across high-quality enterprises in different industries, the overall portfolio impact of one sector being the target of a sell off is minimised. That can make enduring volatile stock markets a bit easier while simultaneously protecting against prolonged cyclical downturns.
The last tactic is to hold firm. Despite the urge to take action when things go wrong, the best move is often to do nothing. Short-term challenges and threats come and go like the wind. However, a hallmark of a high-quality stock is being able to stand through such headwinds and continue to thrive in the long run.
So providing the underlying business doesn’t become compromised, holding through the storm may be the best move to protect wealth.
Looking at an example
Over the last couple of years, plenty of my stocks have been plagued with volatility. And a perfect example of this would be Warehouse REIT (LSE:WHR). The last-mile logistics landlord was thriving for years, piggybacking the tailwinds of e-commerce demand for order fulfilment. But since interest rates went through the roof, trouble landed in paradise.
Since the start of 2022, the stock price has tumbled almost 50% on the back of higher debt costs as well as falling property values. The group’s balance sheet looked healthy when interest rates were near zero. However, since they were aggressively hiked, Warehouse REIT’s leverage shot up, and management was forced to start selling properties to reduce its debt exposure.
That’s obviously problematic. And it’s not surprising for these shares to be hit hard, especially given the loss of love for the real estate sector in general.
However, despite the headaches, management’s handling of the situation appears to have worked. Only non-core assets were disposed of, raising £169.3m while fixing the cracks in the balance sheet. In the meantime, tenants have continued to pay rent with little delay, supplying the cash needed to maintain dividends.
With Warehouse REIT now back in property acquisition mode and the latest contract renewals delivering a 15.1% boost in rental income, the worst appears to be over, despite shares still trading at a massive discount. So personally, I’ll be capitalising on this volatility once I have more capital at hand.
