How To Safeguard Your Investment Portfolio In An Increasingly Volatile Global Market

For the most part, President Donald Trump’s first 100 days in office have been good for the stock market and the economy in general. The primary S&P 500 ETF (SPY) and the Dow Jones Industrial Average ETF (DIA) have been up 2.9 and 3.6 percent respectively since January, with the Nasdaq 100 ETF (QQQ) returning 6 percent.

However, when reports surfaced in mid-May about Trump’s alleged Russian connection and his firing of ex-FBI director James Comey, the country’s three indexes plunged by 1.7 percent, with the S&P alone dropping 370 points on the same day. Global markets were not spared either; the Nikkei (NTKIF) in Japan, for instance, dropped 414.5 points soon after the revelations.

The past few years have seen an increase in market volatility across global markets, thanks to political and economic uncertainties around the globe. One of the side effects of the current wave of market volatility has been the devaluation of investment portfolios, with investors losing entire retirement funds and life savings in the process. Forex investors have also had to contend with fluctuating money markets, which is further complicated by the challenging task of differentiating between scammers and regulated forex brokers in different parts of the world. 

With Trump’s presidency still going through the motions, the EU and Britain ironing out the terms of their Brexit divorce, North Korea’s powerplay in East Asia, and a myriad of other global issues, the current cloud of uncertainty and volatility is showing no signs of relenting.

Read on for simple ideas on how to protect your investment portfolio from the current wave of uncertainty.

1.       Global diversification

In Q1 2017, the commercial property market in London retained its relatively upward beat, despite everything that’s been going on between Britain and the EU. In Central London, for instance, take-up rates for offices in London doubled compared to the previous quarter, with vacancy rates dropping to 3.3 percent – the lowest in 18 months. The positive outlook within this market highlights the importance of diversification for portfolio resiliency.

Historically, global diversification has offered investors a better cushion against market volatility. International markets often perform at different levels, which opens up opportunities for investors looking to strengthen their investment portfolios. For instance, between 2007 and 2015, the worst- and best-performing markets maintained a 13 percentage point differential in annual total returns, highlighting a huge opportunity for investors looking to secure and grow their investment portfolios.      

Source: MSCI

2.       Investing in dividend-paying companies

Investing in stocks that pay dividends can help cushion you against tumbling markets, helping secure your investment portfolio against volatility. A stable company that regularly pays dividends provides you with investment income and can help provide you with good ROI. Numerous studies have also shown that companies that invest in a dividends program are more likely to grow faster, which translates to higher capital gains from the increase in share prices.

Dividends also help to protect your investment portfolio against inflation, thus providing you with a stable and secure income investment that can withstand the ups and downs of volatile markets.

3.       Asset allocation

Different assets will respond differently to market dynamics, especially at the macro level with globally important markets and economies. With asset allocation, an individual tries to balance out their investment portfolio with a mix of non-correlating assets, for instance, commodities, real estate, and bonds. Asset allocation operates on the premise that if one asset plummets in response to a market trend, another asset within the same portfolio will remain stable or even gain under the same conditions.

Therefore, a good asset allocation strategy can help to secure your investment portfolio while providing the perfect balance between risk and returns.   

4.       Options

Options are popularly used by some investors and many professional traders for speculative purposes. However, when used correctly, options can also be very effective as hedging tools that will help you mitigate risks associated with your investment portfolio. Options are tools that enable investors to buy or sell securities or stocks at a later date at a preset price. So, if you want to protect your investments amid the uncertainties surrounding Brexit, options can be a good addition to your investment portfolio.   

5.       Knowing when to stay out

Sometimes, it’s just safer to stay away from the markets than to risk losing your hard-earned money in a highly volatile market. Even with top-level advisors, investment tools and algorithms, and your sixth sense for investments, losing money is always a possibility. If you have a long-term investment portfolio, it’s sometimes safer to stay inactive and wait for markets to stabilize.

At the end of the day, it’s always better to err on the side of inaction and caution rather than to lose it all in risky trading environments.