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How to deal with the risks of investing in stocks during periods of volatility in the financial markets
6 strategies to deal with stock market fluctuations and reduce investment risks during periods of turmoil:
The British newspaper The Telegraph revealed 6 strategies to reduce the risk of investing in stocks during periods of turmoil and market volatility, as anxious investors sell their shares to avoid exacerbating losses. The report noted that during periods of economic turmoil and market changes, investors usually switch from holding shares of stalking companies that are surrounded by greater risks to old, reliable companies that pay dividends.
Stock markets have come under strong pressure on several occasions recently amid concerns about global economic growth, as well as the trade dispute between the United States and China, and negotiations between the two sides after they reached an armistice. In such cases, anxious investors sell their shares to avoid losses if the markets continue to decline, but selling at a low price means a loss in the event that stocks recover again.
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6 strategies to reduce the risk of investing in stocks during financial crises and market fluctuations
1. Transition from growth to value
During periods of economic turmoil, investors usually move from holding shares of stalking companies that are surrounded by greater risks (such as tech companies that are not making profits) to famous old reliable companies that pay dividends (such as insurance companies and banks that are known to be defensive options in the markets. Stock).
Another safe haven is value stocks, which are not preferred by investors and whose share prices do not fully reflect the value of their assets, and have become a defensive plan for many fund managers.
2. Find Big Size
Small businesses are more vulnerable than others, and their shares often sell off faster during times of crisis than their larger, more established peers, so anxious investors consider avoiding them during turmoil.
Tom Stephenson, director of investment at Fidelity Personal Investing, says that shifting to larger companies reduces risks, but there may be exceptions to this rule.
3. Focus on dividends
In weak economic conditions, companies that pay good returns become more attractive than those that cannot match them, and in some markets there are investors who focus only on this type of stock.
In Britain, income funds aimed at providing an annual return to investors focus on this sector of companies, regardless of economic conditions or defensive situations.
Investors are often asked to apply the famous “never put all your eggs in one basket” wisdom, yet some reliable funds may focus their investments in specific sectors or regions.
For example, the British “Vandsmith Equity” fund invests 65% of its money in the United States, while the Scottish “Scotch Mortgage” invests 28% of its assets in the technology sector. This strategy can achieve strong gains if investment managers choose better stocks, but the opposite is true, if their choices are not successful; The losses could be heavy.
5. Looking at assets other than stocks
Some funds look beyond stocks to achieve strong returns, which is a strategy that does help them at times, and this may include some derivatives. Some funds in the United Kingdom are planning to pay 7% of the annual income they give to their clients through stocks and the sale of derivatives, and they believe that in this way they may secure more profit if the markets are disrupted
6. Comparison of active and passive investment
Passive investment funds that closely track stock indices may lose drastically as much as they can gain. Unlike active asset managers, where one can choose or avoid stocks to mitigate the effects of bearish situations, these funds managed by computers and algorithms do not have the luxury of choice, and during market volatility their path is only down.
Read also: 5 books to help you handle money professionally – Personal Financial Education Books
In passive investment funds, there is no place to hide, experts say, and some large companies can dominate the performance of a particular index, ultimately leading to the investment not being as diversified as it appears.
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