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Investors need to keep emotions under control in this volatile market

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Investors need to keep emotions under control in this volatile market

Nicholas McComber E + | Getty Images

Whether you’re new to investing or working in the market for years, you may feel a little like you got lost in the sea in search of a safe haven.

Investors are struggling with a merger of market forces such as inflation, rising interest rates and the conflict between Russia and Ukraine. It is a troublesome combination of macroeconomic factors that blends in with a world that is still dealing with the effects of a pandemic.

Changes in the market have encouraged many investors to look for portfolio strategies on how to navigate this market. While no one can predict exactly what will happen next, there are strategies that investors may consider to implement to help manage their portfolio through this volatility.

The starting point for every investor should be the removal of emotions from investing. The main thing, of course, is to avoid making irrational investment decisions.

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Market volatility, especially when it leads to lower asset prices, can make investors very emotional. Recent discussions about the possibility of a recession are causing many investors anxious feelings about 2008 (the great financial crisis) and 2020 (the beginning of the Covid-19 pandemic).

Fear often generates poor investment decisions, so investors should try to pause and take a more analytical approach to evaluating their investment decisions. There is nothing wrong with changing your investment strategy or distribution if it is based on facts rather than emotions.

As part of a more analytical approach to the portfolio, investors need to evaluate their current monetary positions. Ideally, the investor should have sufficient liquid assets outside the market to cover the cost of living for the next 12 months. Confidence that all current living expenses are met can help investors not so emotionally and mentally influence market fluctuations.

Investors should also focus on long-term strategy and should not lose their appetite for stocks.

It is not uncommon for investors to refuse to invest in stocks after a difficult period in the market. However, investors should not allow current volatility to forever close the door on stocks as an investment distribution.

Instead, investors should remind themselves that despite a poor start to 2022, stocks remain the best source of long-term asset growth. The current market offers the opportunity to make investments today that will bring income and price increases in the future.

The investment portfolio should also be carefully reviewed to reflect changes in the market environment. That means making some rebalancing.

The market has taken a more defensive stance; quality companies with strong balance sheets and pricing power are superior now and possibly in the future. With rising interest rates fixed returns and cash investments will have poor long-term real returns.

Investing a portfolio in dividend-paying companies is a great way to provide cash flow to help buffer market volatility. Dividends are also more common in strong, long-lived companies that can act as relatively safe ports in a turbulent market. Investors also need to rethink which sectors can benefit from the current environment.

For example, it can be argued that financial performance will benefit from higher interest rates or that health stocks will be insured against inflation and interest rate fears as demand for their products remains stable.

Finally, investors should not forget that there is value in getting tax losses from weak companies. These losses can be used to offset returns on other investments and provide the necessary cash for opportunistic portfolio redistribution.

Certainly, the last few months have been challenging for every investor.

It is best to focus on your portfolio strategy and look for long-term market opportunities. Portfolio reorientation and revision is an important part of a successful investment process.

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