Volatility Taunting Fresh Equity Buyers
As volatility hit its highest points in decades and investors scrambled out of the stock market, the long, bearish winter of 2020 has seen new investors take stock. A global economic recovery is likely to still be months away, but market swings, prospects of more stimulus, and higher-than-expected earnings have drawn more equity buyers to stock markets.
No matter what your individual view may be, the stock markets have declined from their peak levels of late January, leaving some investors unsure of when to buy and still scared of the potential return of a recession.
With volatility taunting, long-term investors can draw comfort from understanding the kind of stocks from which to build a solid portfolio. The latest investor data suggests that when equity markets fall sharply, the best thing to do is buy stocks with lower volatility and higher dividend yields.
This means that investors should focus on stocks with low price fluctuations, with a focus on companies with strong balance sheets and a history of resilient performance during numerical market gyrations. Owning stocks with a reliable dividend yield becomes even more important, as low-yielding stocks typically outperform higher-yielding stock during market downturns.
Therefore, investors should assemble a portfolio of stocks with higher dividend yields relative to the market’s performance, such as utilities, consumer staples and telecommunication companies, as these sectors tend to be less sensitive to economic cycles and are ‘better’ insulated from volatility.
Investors can also look at short-term strategies, such as allocating part of their portfolio to companies that are pushing through the current economic conditions more rapidly, or those benefiting from current events, such as computer gaming and data centers.
In addition to diversifying your holdings, investing with bonds, or exploring alternative assets, the best way to manage risk when investing is to have a long-term investment plan. With this plan in hand, investors can be mindful of market swings and leverage opportunities to buy ‘on dips’ and scale back on risk when valuations start to look stretched.
To understand the best ways to reduce risk and build a portfolio of stocks that are better suited to the current market; investors should consult with fund managers who are adept at managing equity markets through cycles. The opportunity to buy stocks right now should be seen as a way of taking advantage of tumbling markets, but investors should stay focused on the long-term potential of the markets.