How to Protect Your Investments During Market Volatility

Your investing journey can feel daunting - especially when markets take a sudden dive. If you watch your investments closely, you might feel the stress of market volatility. But before you panic, it’s important to remember that market ups and downs are part of investing. While it can be nerve-wracking, market volatility isn’t something you can completely avoid. The good news, though, is you can prepare for it. By making informed decisions and taking proactive steps, you can protect your investments and even find opportunities in these moments of change. In this blog, we’ll cover some simple yet effective strategies to help protect your portfolio during uncertain market conditions.

Understanding market volatility

Market volatility is one of those terms you often hear thrown around in the world of investing, but what does it actually mean? Put simply, volatility refers to the rate at which the price of an asset (such as stocks) rises or falls for a given set of returns. When markets are volatile, you see sharp swings - both up and down - in the value of your investments. This unpredictability is often caused by several factors, such as economic changes, political events, and global crises, which can cause sudden market changes. For example, events like the RBA raising interest rates or a geopolitical conflict can create uncertainty in the market, leading to price fluctuations. While volatility may seem like a bad thing, it doesn’t always mean disaster—it’s a natural part of the financial ecosystem and can create buying opportunities for savvy investors. Volatility also allows you to purchase assets at a lower price, provided you’re in a position to hold onto them for the long haul. 

Diversify your portfolio

One of the most effective ways to protect your investments is through diversification. Diversification aims to spread your wealth across different investments so your wealth is protected. For example, if your portfolio invests heavily in one asset type (e.g. solely stocks), any significant decline in that market could seriously damage your overall wealth. Diversification helps spread risk across different types of investments, such as stocks, bonds, and real estate. Each asset type reacts differently to market conditions, so if one area of the market is underperforming, another may be doing well. For example, while stock markets might be experiencing volatility, bonds could provide steady returns, helping protect your portfolio from severe losses. You can also diversify your portfolio within asset types. For example, you might want to invest in different industries like technology, healthcare, and consumer goods within your stock holdings. By doing this, you’re reducing the overall impact of market volatility on your portfolio.

Focus on long-term goals

Sometimes, it’s easy to get caught up in the daily fluctuations of your investments. However, reacting emotionally to short-term market changes can be damaging to your financial future. Selling assets at the first sign of trouble may provide temporary relief, but it can also mean losses and missing out on potential benefits. It’s crucial to remember that investing is a long-term strategy. Markets naturally experience highs and lows, but historically, they trend upwards over extended periods. By focusing on your long-term financial goals, such as retirement or achieving financial freedom, you’re more likely to weather the storm and come out stronger on the other side. However, while sticking with your investments is important, it’s also a good idea to regularly review your financial goals to ensure they align with your current situation. If your circumstances have changed (e.g., job loss, starting or expanding your family, health concerns, etc.), adjusting your investment strategy accordingly can help you avoid unnecessary risks.

Maintain a cash reserve

To avoid having to sell assets when the market is down, it’s important to have some savings available. This is essentially an emergency fund that you can dip into for living expenses, unexpected costs, or other opportunistic investments without having to touch your portfolio. Having money aside provides a level of security and flexibility. If the market drops, you won’t be forced to sell investments at a loss just to meet your financial needs. Instead, you can give your investments time to recover. Additionally, maintaining a cash reserve allows you to take advantage of buying opportunities when market prices are low. As a general guide, we recommend keeping three to six months’ worth of living expenses in your emergency fund. The exact amount, however, will depend on your personal circumstances, but having this buffer can give you peace of mind during uncertain times.

Seek professional advice

Navigating market volatility can be overwhelming - especially if you’re not an experienced investor. That’s where seeking professional advice comes in. The expert team at Inovayt can help you develop a strategy tailored to your specific goals, risk tolerance, and financial situation. We provide you with a clearer understanding of how to protect your investments while still pursuing growth. Our team also offer an objective perspective during market fluctuations, helping you avoid emotional decision-making. Instead of reacting to every market change, we will work with you to ensure you’re taking both short-term volatility and long-term gains into account.

Protecting your investments with the Inovayt team

Market volatility is inevitable, but it doesn’t have to interfere with your investment strategy. By understanding how the market works, diversifying your portfolio, focusing on your long-term goals, keeping a cash reserve, and seeking professional advice, you can protect your investments and even find opportunities during difficult periods. At Inovayt, we’re here to help you navigate the ups and downs of the market with confidence. If you’re concerned about how volatility might affect your financial future, get in touch with one of our financial advisers today and together, we’ll develop a strategy to keep you on track toward achieving your goals, no matter what the market throws your way.