Volatility is an inevitable part of being an investor in the stock market.
With the internet today, news travels fast. Even the smallest hint of news or macroeconomic statistics can send stock prices on a rollercoaster ride.
Bottom line: it’s not something you can avoid if you invest in stocks.
These rapid price swings can evoke a range of emotions, from confidence to fear, for investors.
When your hard-earned money is on the line, it is natural to feel intense emotions in the face of volatility.
This raises a crucial question: How can investors steer through this turbulence and still come out on top with good investment results?
Volatility in action
You do not have to search far for instances of intense volatility.
When the pandemic emerged and spread globally, major stock market indices experienced significant declines.
Consider the NASDAQ Composite Index.
This leading technology stock index plummeted from 9,732.74 on February 18, 2020, to 6,860.67 on March 23, 2020, marking a drop of nearly 30% in just one month.
Closer to home, Singapore’s Straits Times Index (STI) fell by 26% in slightly over two months, dropping from 3,257 on January 15, 2020, to 2,410.74 on March 20, 2020.
More recently, the NASDAQ Composite Index also experienced a decline of over a third of its value from November 2021 to October 2022, before rebounding strongly in 2023 and this year to reach new all-time highs.
Apart from indices, individual stocks also showcase substantial volatility.
Meta Platforms (NASDAQ: META), for instance, witnessed its share price plummet from US$378.69 in September 2021 to US$88.91 in November 2022, marking a decline of over 76%.
The social media giant then underwent a dramatic rally, with its share price skyrocketing more than fivefold to close at a record high of US$509.58 last Friday.
Local stocks such as iFAST Corporation Limited (SGX: AIY) are also not immune to stock price swings.
The fintech’s share price surged from around S$1 back in April 2020 to nearly S$10 in September 2021 before crashing to S$3.57 by October 2022.
The stock then staged a breathtaking rally to hit S$8.47 in December last year before correcting to the current share price of S$6.94.
This level of volatility is not for the faint-hearted, so here are some strategies you can employ to navigate these sharp fluctuations.
Diversify your portfolio to build resilience
While individual stocks can be highly volatile, diversification serves as a powerful tool to mitigate these fluctuations.
The concept involves spreading your investments across various asset classes, industries, and geographical areas.
One approach is to hold a mix of stocks and bonds, which can help limit your portfolio’s overall volatility.
For those heavily invested in stocks, it’s essential to diversify within this asset class, incorporating different types such as growth stocks, dividend stocks, and established stalwarts.
Growth stocks, known for their lofty valuations, are often more volatile, particularly when earnings fail to meet high expectations.
In contrast, blue-chip stalwarts and dividend-paying stocks tend to be less volatile due to their sturdy business models, robust free cash flow generation, and consistent dividend payouts.
Furthermore, political or economic risks within countries can exacerbate volatility for stocks, underscoring the importance of diversification across regions.
By diversifying effectively, you can significantly reduce your portfolio volatility, affording you peace of mind.
Maintaining a long-term investment philosophy
Stock prices can swing dramatically in the short term due to various factors, including fundamental shifts in the business and investor sentiment.
This phenomenon underscores the importance of maintaining a long-term investment perspective rather than fixating excessively on short-term movements.
Although rapid gains may appear tempting, it is nearly impossible to consistently predict short-term market or stock direction accurately.
Embracing a long-term mindset enables you to disregard transient market fluctuations.
By prioritising the underlying business performance and its long-term trajectory, you can weather these fluctuations with ease.
Ultimately, investing is about cultivating and compounding wealth over extended periods, potentially spanning years or even decades.
Focus on fundamental business attributes such as earnings, dividend consistency, and growth prospects, rather than becoming preoccupied with short-term price shifts.
Adopt a systematic approach to investing
When it comes to paying invoices, many of you likely automate the process by setting up standing orders with your bank.
This practice ensures timely bill payments and helps avoid occasional forgetfulness, which can lead to late fees.
Similarly, automation can be applied to investing.
Known as dollar-cost averaging or DCA, this method involves investing fixed sums of money into the stock market at regular intervals.
By automating your investment contributions, you can mitigate the impact of market volatility by purchasing more shares when prices are low and fewer shares when prices are high.
DCA is particularly effective for exchange-traded funds (ETFs) since indices tend to trend upward over time.
When implemented correctly, DCA enables you to steadily build wealth through consistent investments, regardless of market conditions.
Embracing volatility
Instead of shying away from volatility, it is essential to embrace it.
Why? Because volatility often creates attractive opportunities in the stock market.
Investors tend to overreact to short-term negative events that do not significantly impact a company’s long-term prospects.
During these periods of heightened volatility, it is wise to see it as a chance to increase your position in well-managed businesses with strong long-term potential.
Therefore, volatility should be seen as a friend, allowing you to accumulate shares in robust companies for the long haul.
To capitalise on these opportunities, focus on researching fundamentally-sound businesses that you feel confident investing in through both good and challenging times.
Consider reputable businesses like DBS Group (SGX: D05) and Singapore Exchange Limited (SGX: S68), along with well-managed REITs such as Parkway Life REIT (SGX: C2PU) and CapitaLand Integrated Commercial Trust (SGX: C38U) that boast high-quality portfolios.
Armed with this knowledge, you can seize the chance to scoop up bargains when these resilient companies experience sharp declines in their share prices.
Get Smart: Learning to live with volatility
Market volatility is a natural characteristic of healthy stock markets.
However, it does not have to trigger anxiety among investors.
By embracing a diversified portfolio, maintaining a long-term outlook, and implementing dollar-cost averaging (DCA), you can confidently navigate market fluctuations to reach your financial objectives.
It is crucial to understand that successful investing isn’t about avoiding volatility entirely.
Keeping all your funds in the bank might shield you from market fluctuations, but it exposes your money to erosion through inflation.
Volatility, in essence, is the price you pay for the potential to enjoy robust long-term returns from your stock investments.
Effectively managing volatility with the strategies outlined above is key to achieving favourable investment outcomes.
Note: An earlier version of this article appeared in The Business Times.
First-time investors: We’ve finally released our beginner’s guide to investing. Read it in an afternoon, follow the principles, pick an investing style and buy your first SGX stocks within the next few hours! Click here to download it for free.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Royston Yang owns shares of DBS Group, iFAST Corporation, Singapore Exchange Limited and Meta Platforms.
