Five ways to survive stockmarket volatility
Volatility is what makes up the stockmarket. As an investor, you shouldn't be afraid of volatility but rather harness it to buy into top stocks at great prices. Here are Skaffold's five tips to help your portfolio flourish through volatile markets.
1. Don't be afraid to sell
Holding on may prevent you from physically banking a loss but it's also holding you back from investing that money in a better opportunity. Sitting on an unrealised loss may make you feel better, because you're certain "it'll come good one day", but it's money that's not working for you. And money that isn't working for you can't make you more money.
2. Don't chase dividends blindly
Getting caught up in the frenzy of dividends can be dangerous. Before jumping on the yield bandwagon, double-check how a company's dividends are being funded. If debt has been increasing or the company has been raising capital, then you're better off steering clear. If you invest in top stocks with quality balance sheets and strong growth, the dividends will take care of themselves.
3. Avoid bad stocks in the first place
This is pretty simple but as humans we don't always apply rational logic when it comes to stocks. If earnings are declining, dividends are higher than earnings, profits are stagnant, profitability as measured by return on equity is less than 5% and cash flows are lower than profits, don't buy the shares. The best way to survive volatility is to avoid dog stocks. Of the companies listed on the ASX, 65% don't actually make any money. Wipe out companies loaded with debt and your choice is limited to just 25%. Once you apply criteria specifically to uncover top stocks, the list is reduced to about 10 stocks.
4. Holding cash is better than taking a loss
If you pour $5000 into a hot tip, and that hot tip goes bad, you need to recover your original $5000 before you can start to think about profits. In a volatile market, that is a tough job. That's why sometimes it is better to keep your hard-earned savings in the safety of cash rather than risk it on a hot tip.
5. Build a watch list of top stocks and jump in when there is a correction
Patience is a virtue that unfortunately many of us lack. If you want to be a successful stockmarket investor, it's the one single quality you need to harness. With a shortlist of 10 or so stocks to buy, patient investors use corrections to buy in when share prices are temporarily.
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