Sell in May and go away is an often-repeated saying in the markets. In some years, this old adage doesn’t apply, but the markets lived up to their seasonal reputation last month. Major market averages are showing weakness in early June too.
And all of this is starting to make investors feel a little anxious. But what would you rate as one of the most reliable safeguards against stomach-churning volatility in the stock market? I would say diversification, both among your wider investments and specifically within your share portfolio. So June might be a good month for you to revisit your investment goals for 2019.
Risk and return
Does it feel as if there is nowhere to hide in these crazy markets? Sometimes yes, even though we all know that in investing, risk and return go together. Where there is a potential return, there is also a potential loss.
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For example, since the end of the financial crisis of 2008, most technology shares have been investor darlings. There seems to have been no limit to how much some of these stocks can appreciate. However, the past few weeks have also shown investors how far and how fast they can fall.
On the other hand, a savings account at a UK-regulated bank or building society guarantees the safety of your money for up to £85,000 per person, yet offers a really low annual return.
Asset allocation – which can simply be defined as how you’d divide your investments among shares, bonds, bank-deposits, as well as other types of investment vehicles such as real estate or physical gold – determines your portfolio risk and returns.
The aim is to strike the right balance between more potentially volatile assets such as shares and more stable ones.
The right asset mix
Once you have decided how much of your wealth you would like to have in equities, it is time to look at how you want to allocate your money among different types of shares. Market volatility often attracts investors to utilities, healthcare, consumer staples, and possibly gold stocks.
You may also think about buying into the shares of established companies that also pay dividends and have conservative payout ratios. Thus you’d have some relatively safe passive income while you wait for the markets to turn around.
Diversification will not eliminate all the risk in your equity portfolio. But your long run risk/return ratio is likely to be more attractive.
If the decade-long bull market is truly beginning to lose steam, a share portfolio constructed of different kinds of companies and sectors will, on average, yield higher returns and enable you to ride out the volatility of the stock market.
In other words, if you are tired of the volatility, portfolio diversification may be just what the doctor ordered.
Are you in the markets for the long term?
While your share portfolio balance may have taken a hit in the past few weeks, now is not the time to panic.
At The Motley Fool we believe in holding shares for the long term. Strongly-performing shares tend to keep on winning so a fall in their share price during a market downturn might give you the opportunity to buy more of them, as long as you still believe in the fundamental story behind those companies.
