Five strategies to manage your investments in a volatile market

Diversify, actively manage your portfolio, hedge risk, be tactical and use a factor-based approach

Successful investing demands a disciplined, long-term approach. Getty Images

Equity markets across the world, especially in the US, witnessed a spectacular rally in 2023, bringing relief after a dismal performance in 2022.

The last leg up since October has been quite sharp, predominantly spearheaded by major technology companies, more specifically the ones riding the artificial intelligence boom.

Investors seem to be complacent, reflected in an extremely low reading on the VIX index, a commonly used measure to track market volatility.

In a muted environment, investors are advised to adopt a cautious approach, as volatility is expected to pick up at some point this year.

Below are five investment strategies that can be considered during these times of great market uncertainty.

1. Diversify

Sometimes it is best to simply focus on the basics. As the old saying goes: “Never put all your eggs in one basket.”

It is advisable to spread your investments across different asset classes such as equities, bonds and alternatives.

At its core, diversification serves as a powerful risk management tool, offering protection against the inherent unpredictability of financial markets.

This strategy not only reduces the overall risk in your portfolio, it can also significantly mitigate against the impact of market volatility on your overall investment performance.

Typically, damage to one asset class could be survived (if only partially) by others in the portfolio.

2. Take an active role

In a dynamic market environment, passive or beta investing may not offer the optimal approach for navigating your investments, at least in the short to medium term.

As uncertainty looms and market fluctuations become more pronounced, adopting an active role in managing risk within a portfolio is arguably the most important thing any investor can strive for.

For instance, you can explore employing techniques such as using stop-loss orders or adopting downside protection strategies such as buying put options.

Unlike passive strategies, an active approach empowers investors to seize opportunities.

The key lies not only in the adoption of risk mitigation techniques but also in the cultivation of a proactive mindset, thus making decisions to enhance returns and minimise downside exposure.

3. Use hedging techniques

In times of market uncertainty, the concept of hedging may serve as a powerful tool to offset against potential losses.

Hedging techniques can provide downside protection by establishing positions that profit from adverse price movements.

For instance, purchasing put options or putting in place bearish strategies can help to mitigate losses during market downturns, while allowing investors to maintain exposure to potential upside.

By incorporating these strategies into wealth management, investors can not only protect their portfolios from potential losses but also position themselves to capitalise on opportunities that arise amid market turbulence.

4. Become an investment tactician

Any investment strategy does not have to be cast in stone. Rather than adhering to a static asset allocation strategy, it is advisable to consider employing a tactical, dynamic approach that involves adjusting allocations on the basis of short-term market conditions.

Becoming an investment tactician entails employing strategic moves to optimise portfolio performance amid market volatility.

Therefore, the strategy of dynamically increasing allocation to assets could yield near-term benefits, followed by a return to the strategic allocation once that move has demonstrated its efficiency.

5. Explore factor-based opportunities

While traditional investment approaches to asset classes such as stocks and bonds is natural as it has long been the norm, it is important to recognise the opportunities available and embrace factor-based investing strategies.

This approach represents a shift in portfolio construction by focusing on specific factors such as value, momentum, quality or even volatility.

Factor-based strategies offer the potential to diversify portfolios and potentially enhance risk-adjusted returns, effectively combining several of the strategies above.

Irrespective of the strategies you employ, successful investing demands a disciplined, long-term approach.

While impulsive decision-making may be tempting at times, it is prudent to resist the urge to react hastily to market fluctuations and stay on track with your investment plan.

By refraining from emotional responses to market volatility, you can focus on accomplishing long-term financial aspirations and objectives.

Anuj Goel is senior executive officer at Century Private Wealth