Investment strategy to hedge against market volatility

Whether you are new to investing or have been in the market for years, volatile times can leave all investors feeling a little lost in the market sea, looking for a safe harbor. Along with the expectation of high returns, novice investors also have to bear the confluence of market forces such as inflation, interest rate hikes and market volatility. It is a troubling combination of these macroeconomic factors that often drives newcomers out of the market entirely and calls into question their long-term investment strategies.

Market volatility, a statistical measure of the tendency of the market to rise or fall rapidly over a short period of time, can be affected by changes in interest rates, taxes, inflation rates, day traders, short sellers, and high-frequency firms and other monetary policies. and may also be affected by industry changes and national and global events. But what is certain about market volatility is that it is inevitable. The market will continue to fluctuate between good days and bad days and bumpy rides like these have forced many investors to look for portfolio strategies on how to navigate this market. While no one can predict the market’s next move, there are strategies that investors can consider implementing to help manage their portfolios through this volatility.

Hedging against volatility

To navigate through the volatile phases of the market, the most important solution for investors is to maintain a long-term horizon and ignore short-term fluctuations. One way to hedge a portfolio is to sell shares or set stop-loss orders that can be sold automatically when the price falls by a certain amount, or by buying a Nifty put or bear put spread, i.e. using month-to-month contracts or long-dated options. Understanding portfolio structure.

However, it is important to keep in mind that hedging or mitigation has additional costs and different underlyings have different betas. And many times instead of full hedging, partial hedging can protect your existing position as well.

Trading volatility with multi-asset funds

Investing in diversification, i.e. holding unrelated assets and stocks in a portfolio, can reduce the likelihood of overall volatility. Some assets in the market do not exhibit the same degree of volatility as equities and as a result, alternative assets typically lose less value and add stability. Therefore, unlike cash, alternative assets such as gold generate positive returns over time because gold generally benefits from macroeconomic volatility.

Non-directional investment

Unlike many preferred options, directional investing in which markets constantly move in a direction that can either be down for the long term or down for the short term, investors in non-directional investing try to overcome market inefficiencies and pricing anomalies. As its name implies, non-directional strategies are indifferent to price increases or decreases and therefore can succeed in both bull and bear markets.

Invest to create a position in stock futures

In a bear market, investors are always advised to look at futures and options as a low margin alternative to cash market trading. Here, investors can focus on high-growth stocks and high-margin businesses that have high margins and traditionally exhibit high levels of transparency and corporate governance. And, if you’re willing to dive deeper and be more adventurous, you can also look at volatility strategies like straddles and strangles. These are your best bets and are likely to outperform amid volatile markets.

Sometimes it’s better to do nothing

It’s important to be comfortable with your plan and your portfolio, but know your tolerance for market volatility. As a general rule, the market operates on two strategies, when to buy and when to sell, but there is a third strategy that is not as well-known, which is knowing when to do nothing. And the basic rule of thumb is if you don’t understand the undertones of the market, get out of troubled waters at the right time and do nothing.

Instability hurricane weather

When it comes to financial markets, risk and uncertainty are a part of the deal that will never go away. While risks can never be completely avoided, adversity can certainly be minimized and portfolio hedging is one way to protect a portfolio from potential losses. This can help investors take enough risk and stick with effective hedges until better days come.



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The views expressed above are the author’s own.



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