How to keep calm during market volatility | RBC Brewin Dolphin (2024)

FAQs

How to keep calm during market volatility | RBC Brewin Dolphin? ›

Build a well-diversified portfolio

Diversifying your investments can help minimise your risk and reduce the impact of any stock market volatility. Heavy exposure to one particular asset or particular type of investment means that you're more susceptible to any fluctuations that occur.

The strangle options strategy excels in high volatility. A long strangle involves buying both a call and a put option for the same underlying share but with different exercise prices, offering unlimited profit potential with low risk.

Having a broad mix of investments — stocks, bonds, as well as real assets and non-traditional investment strategies — across sectors and asset classes as appropriate can help you weather volatility.

Despite their market-neutral position, market makers still face directional risk, especially when prices are volatile. To avoid volatility risk, market makers often hedge their positions with correlated instruments (such as options or futures).

One way to help protect yourself from market downturns is to own various types of investments. First, consider spreading your investments across the three asset classes — stocks, bonds, and short-term investments. Then, to help offset risk even more, diversify the investments within each asset class.

Should you trade when the market is volatile? ›

Market volatility brings increased opportunity to profit in a shorter amount of time, but also carries increased risk. Risk control measures—such as stop losses—gain in importance when markets are more volatile.

Options traders can make a profit trading volatility but this requires a strategic approach. Common strategies to trade volatility include going long puts, shorting calls, shorting straddles or strangles, ratio writing, and iron condors.

Diversify: Spread investments across different asset classes and regions to reduce risk. A diversified portfolio can better withstand market volatility. Focus on the long term: Maintain a long-term perspective. Markets have always rebounded from past downturns to reach new highs, rewarding patient investors.

Stocks have a tendency to be correlated; they generally move in the same direction, especially during times of higher volatility. Investors can hedge with put options on the indexes to minimize their risk. Bear put spreads are a possible strategy to minimize risk.

The first and most crucial tactic is to adhere to your investing strategy. Having a long-term plan based on your investment objectives, risk tolerance, and time horizon is necessary. Remember that market volatility is a distinctive aspect of investing and is not a cause to give up on your investment strategy.

Don't trade with a vague trading plan. Consider all possible adverse events, and consider how the price may move in ways that you had not anticipated. Specify the signals that will tell you at what point you should logically abandon your plan.

Two important considerations are position size and stop-loss placement. During volatile markets—when day-to-day price swings are typically greater than normal—some traders place smaller trades (commit less capital per trade) and use a wider stop-loss than they would when markets are quiet.

Diversification is a must!

It's the most common strategy employed by investors and is your best weapon against market volatility in the short-term. The strategy follows that by holding a diverse range of assets, such as stocks, bonds, and cash, investors can reduce the overall volatility of their portfolios.