We are currently living in remarkably uncertain economic times. With high inflation showing little sign of slowing down, interest rates rapidly rising, global political and humanitarian crises causing market unrest, supply chain disruptions persisting, and the increasing threat of recession on the horizon, there really is no shortage of intersecting risks that have many investors feeling anxious and unsure about how to manage their finances going forward.
Do Not Panic Sell During Down Markets
When stock values rapidly decline across the board in a short period of time, it can be incredibly tempting for investors to panic and cut their losses by selling off assets. Nevertheless, this panic selling often locks in losses at exactly the worst time – right at the bottom of a temporary market downturn, preventing any gains when share prices ultimately recover in the future. Investors who avoided the instinct to mass sell during the Great Recession, Asian Financial Crisis, and other major pullbacks saw their portfolios bounce back in full just a few years later.
Diversify Broadly Across Asset Classes
Rather than concentrating investments narrowly in just one specific asset class or segment of the equity markets, spreading assets across markedly different classes can provide critical risk mitigation benefits to a portfolio. The good folk over at Outseer.com tell us that this thoughtful diversification means poor performance in one area that may be struggling due to current financial conditions can potentially be strategically offset by stability and steady gains in another area. Many financial advisors almost universally recommend keeping a diverse mix of stocks, bonds, real estate, commodities, and some cash and cash equivalents. Rebalancing this mix at least once a year is recommended so as to restore original target asset class allocations as values shift.
Prioritize Dividend Income Investing
In tumultuous markets where share price volatility runs high, dividend-paying stocks and funds that deliver consistent income over time can provide ballast to anchor a portfolio amid choppy trading. Focusing equity and fund investments on companies with long track records of reliable dividend payments quarter after quarter and year after year gives durability against uncertainty and volatility.
Use Bond Laddering To Manage Interest Rate Risk
Bond values have an inverse relationship with interest rates – they tend to fall when benchmark rates rise across an economy, as newly issued bonds can offer comparatively higher yields. This interest rate risk can actually be mitigated largely by building a portfolio of individual bonds with strategically staggered purchase dates and maturity dates spanning multiple years rather than all at once. When some smaller batch of bonds within the ladder mature periodically and return their principal to investors, this cash can then be reinvested into purchasing new, higher-yielding bonds to account for market rate changes. Laddering bond maturities in this way helps smooth out exposure to rising rate environments.
Stress Test Your Asset Allocation
Evaluate how your unique portfolio would hypothetically perform under various adverse scenarios like stagflation, demand-pull inflation from a supply shock in oil, lagging GDP and corporate earnings growth, or persistently rising structural unemployment over years. Making selective adjustments to shore up portfolio vulnerabilities to the most likely risks based on economic data can provide better risk mitigation for weathering different storms.
Conclusion
Employing strategies centered on effective, customized risk mitigation allows portfolios to stay on course. This includes avoiding panic induced trades, diversifying across differentiated assets, emphasizing durable dividend payers, actively managing fixed income exposures, strategically incorporating sophisticated hedges, and stress testing asset allocation. Staying invested with a responsive, defensive posture is ultimately key to persevering through volatility on the long journey to investment success.
