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Investing In Times of Volatility

by patrickhaynes

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Many among us have different goals that we hope to achieve in the future. To achieve our goals, a carefully laid plan must be put in place. In the world of investment, we make provisions for future demands or retirement or for just leisure purposes to have that extra bit of income. There is a set time period in which we intend to accomplish our goals and in the world of investments, this is no different. However, in the course of the whole process, there will come a phase when the conditions aren't conducive. Especially in financial markets where the price of financial instruments such as the EUR USD are affected by numerous fundamental events be it a country’s interest decision to the latest unemployment figures.

Have you ever heard of the CBOE VIX index? If you are an investor then chances are that you are aware of this particular index that predicts the level of volatility that the market is expected to undergo in the next 30 days. In common terms it is referred to as an investor's 'fear gauge'. It measures the future performances of the companies in S&P 500 employing a complex formula. If the VIX value crosses 30 then it indicates increased volatility. However, if it hovers around 20, then it is considered to be manageable.

Managing investment in volatile times demands shrewdness. To begin with, when you see that the current plan isn't working out then instead of fretting upon the reasons for far too long, think of an alternative. Redefine what investment success means. In the current environment when the returns are low, the need of the hour is to become more adaptive. Bring dynamism in your investment. This is what we call ‘the first line of defense’. With diversification, the risk is reduced. Depending upon your risk appetite, invest in different asset classes like equity, commodities, real estate, forex, debt etc. Prepare a document that clearly states the investment strategy, expected returns, asset allocation among others. This will come handy in uncertain times. Each class has its own merits and demerits. As historical data shows us, each of them has given better returns than other at different points of time. The point is, each has something unique to offer to the investor. Also, remember the cycle – what goes up will eventually and certainly come down. So, if a particular investment option is on the rise, be prepared for any eventuality. Also, shed the mentality of following the herd.

The stock market crash of 2008 was an awakening call for those who had invested heavily in bonds and stocks suffered great loss. Those with a varied portfolio would have managed to weather the storm and eventually recover from it as well. Volatility is good for the markets because different participants can take advantage of the price movements, e.g. if the price of Gold becomes cheap or expensive investors can add or delete from their profolio.

Re-balancing is yet another option that can be exercised. It is said that this should be done at least once a year. It should be clearly noted that investment is a long-term process with clearly defined goals, with time-horizons that differ from individual to individual. Time in the market is wiser than timing the market. The charm of becoming overnight billionaires is only for the fools to fall for. Be practical and patient and at the same time keep your options open.

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