Various geopolitical issues can affect stock prices and alter them. The recent tensions in India-Pakistan relationship might be the reason you will see a dip in the Sensex and a fall in share prices. But, if you can manage your assets smartly, I bet you will never come across a situation to lose your wealth. Some tips to be followed while managing the stock market are discussed here:
“Rule No. 1 : Never lose money. Rule No. 2 : Never forget Rule No. 1.” ― Warren Buffett
- Diversify across assets: You can spread your investment across multiple segments like commodities, bonds, equities, and cash. Make sure that you don’t hold all the shares that are concentrated in one region and are affected by conflict. There are some defensive sectors, like utilities and healthcare, that are consumer staples that can be very resilient. There are various advantages of running a diversified fund:
- Diversification of funds reduces the risk by spreading investments across various industries and financial instruments.
- Unsystematic risk is generally mitigated by diversification.
- Investors can pick their own assets. Else, they can select from the index fund comprising various companies and holdings.
- Balancing a diversified portfolio can be expensive and complicated.
Diversified portfolios lead to better opportunities and the enjoyment of new assets. Some risks can be mitigated by adjusting to higher returns. You can invest in Big Tech stocks expecting higher returns.
- Safe haven assets exposure increased: You may extend your investment portfolio with gold investment and other precious metals. Let the increase in value occur during gold instability. You can consider US treasuries and other bonds for high-quality sovereign debt for stability. Buy some currencies like the Swiss Franc, USD, and Japanese Yen that often strengthen during turbulent times. Silver can also be considered a safe haven since it is used in the technical and manufacturing industries.
- They tend to be less volatile and predictable during times of economic crisis. Asset volatility is a big factor while choosing investments.
- They offer a balanced portfolio along with higher-risk investments.
- In certain cases, a safe haven can gain in value when other assets decline in value.
- Focusing on quality stocks: You can focus on low debts and strong balance sheets. Companies with a solid foundation can weather economic storms better. There are reliable dividend payers providing high income, even if there is the fluctuation of stock prices. There are large-cap multinationals having diverse streams, but they are generally much more resilient. There are certain steps to it:
- You must look for companies with consistent earnings and revenue growth. You may analyze financial metrics like the P/B ratio, P/E ratio, EPS, ROE, and gauge their performance and profit.
- Analyze the competitive advantage like Moat, effective networks and innovate to adapt to change in the market.
- There is consistent earnings growth, and you can measure the effectiveness of the profit generation.
You can manage the risks by diversification and stop-loss orders.
- Hedging the portfolio: You can choose your portfolio in such a manner that you can shield the downside risks. The inverse ETFs will increase in value when the market falls and offer a hedge. In case you hold foreign currencies affected by tensions, you are in an advantageous position. The advantages of hedging are:
- There is reduced volatility in the portfolio.
- There is limited downside risk as it can reduce the significant loss.
- You will have enhanced risk-adjusted returns.
- Holding more cash or equivalents: Cash can give you more flexibility and impart buying power while the market is dipping. Money market funds or short-term deposits can be offered while the risk remains low. The benefits of holding long-term stocks are:
- They have better long-term returns.
- There is a chance of rising above the highs and lows.
- The decisions taken are not just temporary; they are lucrative.
- Profits that result from the sale of capital assets lead to capital gain.
- Keeping the stocks in a longer-term investment approach feeds you more money.
- Staying informed and reacting rationally: They can monitor developments, but it is better to avoid panic selling. By using stop-loss orders judiciously, you can limit downside risk. You must know what you should do in case of a crisis. You must plan in advance when the market can fall 10%, 20%, or maybe even more. You must follow the behavioral finance principles for a rational investment. Follow some tips to make a rational investment decision.
- Overcoming loss aversion can be achieved by preferring long-term performance rather than facing short-term fluctuations.
- Avoid the herd mentality of following the crowd.
- You can avoid confirmation bias while considering a diverse range of funds when making investment decisions.
- Conducting comprehensive research and relying on data-driven analysis is better than relying on anecdotal evidence.
- Keep ‘SIP ’ing: SIP or Systematic Investment Plans are designed in such a way that the investments can thrive in total volatility. While the markets fall, you will buy more units of the SIP for the same amount. This can be done when NAVs are lower. Stopping SIPs during a turmoil is never recommended since there will be slow and steady returns periodically. There are various advantages of SIP:
- SIPs encourage consistent investment habits.
- You can start investing with smaller amounts. Slowly, you can reach bigger targets.
- By investing a smaller amount, you can buy the same number of shares, especially when the prices are lower.
- Investments and reinvestments can help your wealth grow exponentially.
- SIP helps you achieve your financial targets like home buying, education funding, and retirement planning.
- Stay defensive: Shifting towards some stocks that can perform better during a downturn is recommended. You may choose consumer staples (Coca-Cola, Procter & Gamble), Utilities (NextEra Energy, Duke Energy), Telecommunications (AT&T, Verizon), and Healthcare (Johnson & Johnson). These sectors would remain in demand regardless of the condition of the economy.
The market might be volatile due to the various geopolitical events. But choosing your stocks wisely will allow you to face the probable storm your stocks might undergo or face a wreath of loss. So, follow the tips meticulously before you choose over stocks.
https://www.investopedia.com/trading/hedging-beginners-guide
https://www.bankrate.com/investing/tips-for-diversifying-your-portfolio/#strategies
https://www.investopedia.com/investing/importance-diversification
https://www.parnassus.com/insights/article/focus_on_quality_stocks_enduring_value
https://www.investopedia.com/articles/investing/052216/4-benefits-holding-stocks-long-term.asp
https://www.share.market/buzz/learn/boost-your-wealth-with-these-rational-investment-tips/
