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Strategies To Help Manage Volatility And Risk

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Strategies To Help Manage Volatility And Risk. If you’ve invested in stocks, you probably know the concept of volatility – ups and downs are intrinsic features of financial markets. However, it is crucial to differentiate volatility from risk. Volatility describes the degree to which prices change over time. On the other hand, risk can mean a variety of different things depending on the context. It alludes to the possibility that you will lose a few or all your cash permanently. It also can seek advice from the risk of not meeting your investment goals or of underperforming inflation. Applicable strategies to reduce volatility are;

Diversify Your Portfolio

Would you like to decrease the level of volatility in your portfolio? Diversification is one of the private keys. A well-diversified portfolio made up of a wide range of stocks, bonds and liquid funds could be much less volatile over the long term than a portfolio focused on just a few investments. In a well-diversified portfolio, losses in one sector tend to be offset by gains in other sectors.

Prefer Periodic Purchases In Fixed Quantities

Another approach to help ease concerns about volatility is the periodic fixed-sum method (or the average purchase method). This method involves investing a predetermined amount on a predetermined schedule – say, every month or every quarter – regardless of market conditions. If you’re interested in stocks, you don’t need to worry about whether the prices are going up or down, because this mechanical process does not play with your emotions. You will naturally buy more when prices are lower, and less when prices are higher.

Balance Risk And Reward

It could be okey if you considered your goals, the length of your investment, your volatility and comfort level, and your risk tolerance. As always, the lower the risk, the lower the expected return. For example, a portfolio of purely speculative, growth-oriented stocks is considered highly dynamic. You can make good gains, or you may experience bad losses. A portfolio focused entirely on guaranteed investment certificates, or federal government bonds would be considered too conservative: low risk and low return. But if the returns are so low that they don’t even keep pace with the growth of inflation, then the purchasing power of your savings will gradually decline.

Avoid Following The Herd

Herd mentality can be a psychological trap, according to behavioural finance. For example, it would be better for you to wait patiently in a pessimistic environment rather than following a group that wants to exit the market due to bad economic conditions. Likewise, in times of market euphoria, following the herd sometimes leads some people to make expensive and then overvalued investments. Stay in control of your emotions and remember that ignoring behavioural trends in times of market crisis or boom is essential to making sound investment decisions. Also, stop guessing the market, markets are inherently unpredictable.

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