Investors seek shelter as stocks grow more turbulent

The stock market has been experiencing increased volatility in recent weeks, as investors grapple with uncertainty over the global economy, inflation, supply chain disruptions and the impact of the coronavirus pandemic. Some analysts have warned that the market may be entering a correction phase, or even a bear market, after reaching record highs earlier this year.

In this environment, many investors are looking for ways to protect their portfolios from further losses, or to take advantage of opportunities that may arise from the market turmoil. Here are some strategies that investors can consider to navigate the choppy waters of the stock market.

1. Diversify across asset classes and sectors. One of the most basic principles of investing is to diversify your portfolio across different types of assets, such as stocks, bonds, commodities, real estate and cash. This can help reduce your exposure to any single source of risk, and smooth out your returns over time. Within each asset class, you can also diversify across different sectors, industries and regions, to capture the growth potential of various segments of the economy.

2. Seek quality and value. Another way to reduce your risk is to invest in high-quality companies that have strong balance sheets, stable cash flows, competitive advantages and attractive valuations. These companies tend to be more resilient in times of market stress, and can offer consistent returns in the long run. You can use metrics such as earnings growth, return on equity, debt-to-equity ratio and dividend yield to identify quality and value stocks.

3. Hedge with options and inverse ETFs. If you are more aggressive and want to hedge your portfolio against a market downturn, you can use options and inverse exchange-traded funds (ETFs) to profit from falling prices. Options are contracts that give you the right to buy or sell an underlying asset at a specified price and time. You can buy put options on stocks or indexes that you expect to decline, which will increase in value as the price drops. Inverse ETFs are funds that move in the opposite direction of their underlying index or sector. You can buy inverse ETFs that track the performance of the S&P 500, Nasdaq 100 or other benchmarks, which will rise in value as the market falls.

4. Stay calm and patient. Finally, one of the most important things to do in a volatile market is to keep your emotions in check and stick to your long-term investment plan. Don't panic and sell your stocks at a loss, or chase after risky bets that may backfire. Instead, review your portfolio regularly, rebalance as needed, and take advantage of dollar-cost averaging to buy more shares at lower prices. Remember that market fluctuations are normal and temporary, and that over time, the stock market has historically delivered positive returns for investors who stay invested.

The stock market turbulence is likely to persist in the near term, as investors await more clarity on the evolution of the pandemic, the inflation outlook, and the policy actions by central banks and governments. However, in the long run, the fundamentals of the global economy remain solid, supported by the ongoing vaccination campaigns, the fiscal stimulus measures, and the structural trends such as digitalization, innovation, and sustainability. Therefore, investors who can weather the short-term volatility and maintain a disciplined and diversified approach may be rewarded with attractive returns in the future.