This article has been written by expert contributor Fidelity International
Strategies for navigating volatility in the stock market
America’s tech-laden Nasdaq Index entered a bull market in August. Yes, you read that right. The US technology stocks that led world stock markets into a bear market a month earlier rebounded to such an extent – about 20 per cent – that they were considered to have exited a bear market rally and entered a bull market instead.
At the time, it seemed a little strange, given that the US was already technically in a recession while several other countries were about to enter one.
What this underlines, though, is the fact the economy is not the stock market. Each has the capacity to disengage with the other over short time frames. So, while there’s no getting away from the fact that for some countries, market volatility is now more likely than at almost any other time since the global financial crisis, we shouldn’t translate that directly to our return expectations for stock markets.
What really matters at times like these is having a strategy that can survive or even capitalise on the short-term ups and downs, while maintaining an exposure to the long-term growth and income streams that stock markets can provide.
So here are some ways to prepare for any potential volatility that lies ahead.
1: Stage your investments
Saving regularly is an extremely powerful strategy right up there with compounding – the action of continually reinvesting your dividends to generate potentially further capital gains and dividends.
Regular savings plans are always a good idea, but they work best of all when markets are volatile. That’s because volatile markets may lead to an increased number of opportunities to buy more fund units or shares at low prices and fewer fund units or shares at high prices.
During times of uncertainty in the market, you can be sure there will be plenty of speculation about inflation, interest rates and a whole raft of factors affecting shares. The stock market is very likely to swing one way then the other, as expectations about future events ebb and flow.
In such an environment, regular savers should not be worried. They will be accumulating shares or fund units throughout, and the more volatile markets are, the better their average buying prices could be.
2: Invest in products that consumers either can’t or don’t want to do without
This strategy can lead us in all sorts of directions. Companies that have been around a long time are generally worth a premium when the going gets tough and the future is more than usually difficult to predict.
Investing defensively across a range of sectors could be a smart move in the current environment. From consumer staples to healthcare to utilities, there are sectors considered likely to hold up well even as households cut back on the luxuries of life to conserve cash.
If you prefer growth stocks, then companies making profits today (as opposed to an indeterminate time in the future) with strong balance sheets should continue to see strong demand from investors. The risk is that you overpay for defensive or dependable growth companies because other investors have been thinking the same way beforehand. So, investing in funds with a strong track record of seeking out undervalued, defensive opportunities could be the best route to take.
As a general rule, investing in funds as opposed to individual shares limits risks, which is all the more important when economic conditions weaken.
3: Invest across a range of assets
Most investors know that shares tend to do well when the economy is growing and there is low or moderate inflation, while government bonds benefit from an environment of low or no growth and low levels of inflation.
The best way to hedge against volatile market expectations may be to invest across multiple asset classes, as each has the potential to behave differently, sometimes, in unexpected ways. Sharp falls for a number of commodities over the past few months – including oil, copper and wheat – show how an asset class can spring a surprise, just when you thought you had a good handle on the future.
4: Invest in persistent growth themes
Something we can be sure about, some companies will continue to stand out against the crowd even if markets are volatile. For example, the big drug companies and healthcare providers in general are expected to benefit for at least the next year from the surgery backlogs caused by the pandemic.
Semiconductor shortages continue as well and have become acute problems for developers of electric vehicles and data centres, which have been struggling to source enough chips to keep pace with demand. That’s a positive for chipmakers. Cloud computing is another growth area that’s unlikely to be impacted as it helps businesses to reduce their costs even as they expand.
For the “doomsters and gloomsters”
Finally, it’s worth remembering the investment outlook is by no means all doom and gloom. Stock market valuations around the world have come down since the start of this year, suggesting at least some of the bad news on interest rates and slowing growth is now baked into share prices. Markets could even see a further revival because of this, especially if the economic news and updates from companies we receive over the next few months is better or at least no worse than expected.
The market rally that started in July demonstrates how fast sentiment can change and deserves to be a consideration in how all investors manage their portfolios through uncertain times. Selling investments just before the next big, unexpected rally is not something any investor relishes. A diverse portfolio can help provide an investor with the necessary confidence to avoid doing this.
This, at the end of the day, is at the heart of a successful long-term strategy – one that can ride the short-term ups and downs while continuing to capture growth over time.
Established in 1969, Fidelity International offers world class investment solutions and retirement expertise. As a privately owned, independent company, investment is our only business. We are driven by the needs of our clients, not by shareholders. Our vision is to deliver innovative client solutions for a better financial future.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.