Defending Your Portfolio Against Market Volatility
written by Hartford Investments
Over the past few months, it’s been hard to escape the news of market volatility that’s making investors so nervous across the globe. As painful as it may be to look at your financial statements, it’s important not to get caught up in all the bad news.
The best way to avoid getting caught up in the hype is to keep focused on your long-term objectives, and remember that, as with many things, this too will pass. This is especially true for many Canadian investors who have reaped benefits from the upward ascent of commodity prices. By all means, you should review your portfolio, but it’s imperative that you do so with a clear head so that you avoid making hasty decisions you may regret once the markets rebound.
The best approach is to gain an understanding of market volatility and how it impacts your investments. Equipped with this knowledge you and your portfolio will be in better position to weather the occasional bumps that come with investing in the markets for today — and tomorrow.
Market volatility defined
The term market volatility describes daily price changes of equities and bonds that are unpredictable. Investors can potentially feel the impact of these price fluctuations in the holdings of their portfolio with the values changing based on the movement in the financial markets. Market volatility can be caused by a variety of sources including the state of the economy, political turmoil, world events and natural disasters.
Although market volatility naturally causes investors to worry, it’s a normal and expected part of the market cycle. History has shown that stocks have outperformed other more conservative investments over time and have offered the highest returns. Overacting to swings in the market by selling during market dips, may cause investors to miss out on potential future gains. It’s important to be aware of the risks of investing in the markets, but there is also a risk to being too conservative, and of leaving the market altogether. And the longer you have to invest, the less that market volatility should be a concern.
The big picture
It may be hard to see through all the negative news, but there are some positives that come with market volatility. During times of market fluctuations, it may be possible to find bargain prices on strong companies. But, like any other time you make an investment it’s imperative to consider the appropriateness of the holding to your long-term financial goals, and focus on the underlying fundamentals of the company.
Getting defensive with your portfolio
The best protection against market volatility is a disciplined and well-balanced investment plan that takes these occasional peaks and valleys into account. A well-structured portfolio can help keep you on the path toward your long-term goals by minimizing the impact of short-term market events.
To help smooth out the ride, there are a number of tactics you can implement to defend your portfolio:
- Work with an advisor: When comes to investing, you don’t need to go it alone. In fact, the sound advice of an Investment Advisor can help you organize your financial life and manage your investing needs. Together you can develop solutions that can help you grow and protect your assets during all types of markets.
- Diversify your portfolio: Spreading your assets across different asset classes, market capitalization and geographic locations is an effective way to defend your portfolio. A global or international mutual fund is good way to go as they seek out the best investment opportunities around the world and are not limited by geographical boundaries. Exposure to markets outside Canada and the U.S., may potentially soften any downturns in a single country, sector or company.
- Invest for income: An income-generating mutual fund can be an effective way to build your portfolio no matter what the markets do and at the same time add some stability to your portfolio. Hartford Global High Income Fund from Hartford investments is a good example. The fund gives you the best of both worlds: Access to high-yield opportunities, and risk management through diversification and an investment-grade quality portfolio. That way you get the income benefits of high yield, with the risk management of a traditional fixed income fund.
- Dollar cost averaging*: When you re-evaluate the holdings in your portfolio, it may be the right time to take those gains and switch to another investment. But, it may not be wise to put all of your funds back into the market at the same time. One of the best ways to invest in volatile markets is to use a dollar cost averaging (DCA) approach that gradually invests your capital over time. With DCA you invest at regular intervals, buying more units of a mutual fund, for example, when prices are low, and protecting you from investing everything when prices are higher. Hartford Investments' DCA Advantage Program takes the benefits of DCA one step further by paying you a premium interest rate on money waiting to be invested.
Position yourself for the future
For many investors, market volatility is a wake-up call to review their investments so that they’re better protected the next time markets fluctuate. Keeping a clear head and working with an Investment Advisor can help you build a sound financial framework to weather market ups and downs today and in the future.
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Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing which is available from your investment professional or Hartford Investments Canada Corp. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
*Continuous or periodic investment plans neither assure a profit nor protect against loss in declining markets. Because Dollar Cost Averaging involves continuous investing regardless of fluctuating price levels, you should carefully consider your financial ability to continue investing through periods of fluctuating prices. Please see the prospectus for full Dollar Cost Averaging (DCA) Advantage Program details.