With all the ups and downs of the stock market these days, Wall Street is starting to resemble Coney Island or a Six Flags amusement park. Market volatility has become the norm ever since the surprise election of President Donald Trump in the United States, and investors are starting to worry about the course that the markets will be taking in 2017.
As Wall Street eases into the second quarter of the year, two schools of thought have formed around the issue of volatility. After a couple of months of bullish sentiment, Wall Street seems to be entering a bit of a panic mode, which some analysts believe will be momentary. The other camp of analysts think that the market could experience a correction and go through a bearish period, particularly if the economic stimulus plans of the Trump administration fail to lift the sentiment of institutional investors.
Amidst all the volatility, Federal Reserve Chairwoman Janet Yellen has warned that she is ready to cool any Wall Street fires with interest rate hikes if needed. The Volatility Index (VIX) is on the rise while the S&P 500 exhibits a sideways motion within a narrow range. In other words, the market is a roller coaster, and there are a few things investors can do to deal with these conditions:
Diversification
The timeless Wall Street adage of not putting all your eggs in one basket should be applied as early as possible; nonetheless, it can also be injected to a portfolio that is beginning to feel the effects of a high VIX. The premise of diversification is that volatility tends to affect entire asset classes; for example, a portfolio that is heavy on crude oil futures as well as shares of oil giants such as Exxon-Mobil and BP is bound to be affected by the ongoing political crises and armed conflicts in the Middle East. Diversification across asset classes is not a surefire recipe for profit; nothing on Wall Street is, however, a diverse portfolio is a good method to contain the effects of severe market losses.
Listening to Opportunity When It Knocks
Not everything has to be gloomy when the markets are turbulent. Investors who have been holding on to securities that they were planning on selling may want to do so when the VIX is high, even if the transaction results in a loss. This could be a good opportunity for tax loss harvesting, a strategy that could lower the overall tax burden. Another tactic would be to look for buying opportunities that make sense in context; an example would be buying shares of a financial services providers that specializes in quick loan options at a time when companies are conducting massive layoffs.
Looking For The Upside
Wall Street is a zero sum game; this means that some investors are bound to lose while others stand to gain. For this reason, contrarian investing philosophies tend to be effective during market corrections. Balancing a portfolio during times of high volatility is recommended for investors who like to take advantage of lower prices. To this effect, it is important to keep an eye on previous price-to-earnings ratios that justify the purchases.
In the end, market volatility does not have to be the end of a portfolio for smart investors.