A Guide to Managing Your Portfolio Better During Market Volatility

18 January 2024

A volatile market scenario is characterised by rapid and unpredictable price fluctuations in financial assets like stocks, bonds, and commodities. During such periods, the market experiences sharp ups and downs, often driven by various economic, political, or global events.

For instance, the COVID-19 pandemic caused significant market volatility in 2020, with stock prices plummeting and then recovering. These fluctuations can make investors nervous and uncertain about the future of their investments.

As such, investors need to adopt a proactive approach to safeguard their portfolios and financial well-being. If you are seeking guidance on handling your investments, this article outlines four strategies for managing your portfolio better.

1. Maintain a Long-Term Perspective

Imagine you're embarking on a road trip. You wouldn't constantly change your route based on every twist and turn on the road. Similarly, in the world of investments, having well-defined long-term goals allows you to stay on course despite the short-term noise and turbulence. The following summarises why you should maintain a long-term perspective when it comes to managing your investment.

  • Ensures Financial Security: Long-term goals often revolve around achieving financial security. Whether saving for retirement, buying a home, or funding your children's education, these objectives require time and consistent investment.
  • Increases Your Earnings: Albert Einstein once called compound interest the "eighth wonder of the world”. By holding investments for the long term, you harness the power of compounding. Your money earns returns, and those returns, in turn, generate more returns. Over time, this snowball effect can significantly grow your wealth.
  • Reduces Emotional Stress: Focusing on the long term helps reduce the emotional stress of constant market monitoring. Short-term market fluctuations won't sway you because your eye is on the distant horizon.

In contrast, a reactive, short-term focus can lead to hasty and often ill-advised investment decisions. Here's why it can be detrimental:

  • Chasing Quick Gains: Short-term thinking may tempt you to chase quick gains, often incurring higher risks. This approach can result in losses and erode your portfolio's value.
  • Market Timing Challenges: Trying to time the market by buying low and selling high is notoriously tricky, even for seasoned investors. Short-term thinking often leads to missing out on long-term gains.
  • Emotional Rollercoaster: Short-term market fluctuations can trigger anxiety and panic. Emotional decisions can lead to impulsive selling when you should be holding or buying.

Instead of reacting to market movements, a strategic approach grounded in long-term goals and a clear understanding of one's risk tolerance is advisable. This includes setting a diversified portfolio aligned with your investment horizon and financial objectives, and sticking to it through market cycles.

While market fluctuations can be unsettling, maintaining a long-term perspective is key to successful investing. It requires a disciplined approach, resisting the urge to react to short-term market movements and focusing instead on the bigger financial picture and long-term goals.

2. The Importance of Diversification

In the investing world, the adage "Don't put all your eggs in one basket" couldn't be more relevant. Diversification is a fundamental strategy that can make a difference when navigating the stormy seas of market volatility.

Diversification involves spreading your investments across various asset classes, such as stocks, bonds, real estate, and more that are not correlated. The goal is simple: to reduce risk. When you diversify, you essentially say, "I won't bet everything on a single horse”. Instead, you're investing in multiple horses, each with its strengths and weaknesses different from the other.

Now, why should you diversify your investment portfolio in Singapore during volatile times? Well, here are three reasons:

  • Mitigate Risks: Market volatility often comes with wild price swings. By diversifying your investment portfolio, you're less vulnerable to the extreme fluctuations of a single asset or sector. When one part of your portfolio falters, others may perform well, helping to offset losses.
  • Smooth Out Returns: Volatile markets can wreak havoc on your emotions. However, a diversified portfolio tends to exhibit smoother, less erratic returns. This can help investors stay calmer and more composed, reducing the emotional rollercoaster.
  • Capturing Opportunities: Diversification isn't just about avoiding losses; it's also about seizing opportunities. Different assets perform well in different market conditions. By diversifying, you increase the likelihood of some investments thriving, even when others struggle.

For example, let’s say you have a portfolio divided into stocks, bonds, and real estate investment trusts (REITs). During a volatile stock market downturn, your holdings may decline, but your bonds and REITs might remain stable or even rise. This balanced performance helps cushion the impact of the stock market's turbulence.

Hence, diversification is your armour against the unpredictable nature of financial markets. It doesn't eliminate risk entirely, but it mitigates it significantly. By diversifying your investment portfolio, you enhance your ability to weather market volatility with confidence and composure.

3. Avoid Panic Selling

Market downturns can trigger panic among investors, leading to hasty decisions that may have severe consequences. It's crucial to understand the potential consequences and costs associated with panic selling so you can make informed decisions during turbulent times. Here’s why:

  • Realised Losses: Panic selling during a market downturn locks in paper losses, turning them into realised losses. By doing so, this may harm your investment portfolio’s long-term growth potential.
  • Timing the Market: Attempting to time the market by selling when it's low and buying back when it's high is exceedingly difficult, even for seasoned professionals. Panic selling is often an emotional reaction and rarely leads to successful market timing.
  • Missed Opportunities: Exiting the market during a downturn may lead you to miss out on potential recoveries. Markets have historically shown resilience and the ability to rebound after downturns.
  • Tax Implications: While there’s no capital gains tax on most investment sales in Singapore, frequent trading can incur higher transaction costs and may lead to tax implications if deemed share trading business activities.

Additionally, maintain a focus on your long-term financial goals. Market downturns are often temporary, and a patient approach can pay off in the long run. Be sure to periodically review and rebalance your portfolio to ensure it aligns with your investment goals during market volatility.

4. Rebalancing and Dollar-Cost Averaging

Portfolio rebalancing is a crucial strategy that helps investors maintain the desired balance of assets within their investment portfolio. It involves periodically adjusting the allocation of your investments to bring it back in line with your original asset allocation strategy.

For example, if your initial target was 60% in stocks and 40% in bonds, market fluctuations can lead to deviations from this balance. By rebalancing your portfolio, you get to enjoy the following benefits:

  • Risk Management: Rebalancing helps manage risk by preventing your portfolio from becoming overly weighted in one asset class, which can be particularly risky during volatile markets.
  • Locking in Gains: It allows you to lock in gains from asset classes that have performed well and reinvest in those that may be undervalued.
  • Maintaining Your Investment Goals: Rebalancing ensures that your portfolio aligns with your long-term investment goals and risk tolerance.

Or, if you’re looking for a straightforward yet powerful investment strategy that involves investing a fixed amount of money at regular intervals, regardless of market conditions, dollar-cost averaging (DCA) can be particularly effective during market volatility.

When you employ DCA, you invest a consistent amount of money, such as S$500, into your chosen investments at predetermined intervals, say monthly or quarterly. This approach means you buy more shares when prices are low and fewer when prices are high.

So, why is DCA effective during market volatility? It helps to reduce the risk of making poor investment strategies based on market timing. Instead of trying to predict market highs and lows, you consistently invest, benefiting from the market's long-term growth potential.

It also helps investors maintain discipline during market turbulence, avoiding impulsive decisions driven by fear or desire for gain. On top of that, DCA can help smooth out the bumps in your portfolio's performance, leading to more stable returns over time.

Incorporating portfolio rebalancing and dollar-cost averaging into your investment strategy can provide a structured approach to managing your portfolio during market volatility. Alternatively, you can invest in StashAway SimpleTM Guaranteed. It’s a reliable alternative to traditional volatile investments during uncertain times.

With guaranteed returns of up to 3.6% per annum, it can offer you peace of mind, knowing that your capital investment won’t be subject to the ups and downs of the market. At the same time, it eliminates the emotional stress that comes with market volatility.

Diversify Your Investment Portfolio with StashAway

By entrusting your investments to StashAway, you benefit from a comprehensive diversification strategy that helps safeguard your portfolio during market volatility. This approach aligns with the principles of long-term investing and enables you to stay focused on your financial goals rather than being swayed by short-term market fluctuations.

Share this

  • linkedin
  • facebook
  • twitter
  • email

Want more?

We thought you might.

Join the hundreds of thousands of people who are taking control of their personal finances and investments with tips and market insights delivered straight to their inboxes.