How to protect our money if market volatility returns
It is important to explore tactics recommended by prominent investment banks in the United States.
Market volatility is an inherent characteristic of the world of investments , influenced by factors such as economic changes, geopolitical tensions, or global pandemics.
This unpredictability can significantly affect the value of our investments, making it essential to adopt strategies to protect our capital . That is why it is important to explore tactics recommended by prominent investment banks in the United States, to safeguard our finances in the face of market volatility.
1. Diversification: the first line of defense
One of the most effective and commonly recommended strategies is portfolio diversification. JP Morgan emphasizes that «diversification is key to mitigating specific market risks.» This strategy involves investing in a variety of assets, sectors and geographies, to reduce the impact of volatility in a single investment or sector.
Effective diversification is not limited to selecting different stocks; It also includes investing in bonds, real estate, exchange-traded funds (ETFs), and even crypto assets. Goldman Sachs maintains that «a well-diversified portfolio can smooth out returns over time, as different asset categories do not move in unison.»
2. Safe haven assets: gold and bonds
In times of uncertainty, certain assets have proven to be more resilient, acting as safe havens. Gold, for example, has traditionally been seen as a hedge against inflation and market volatility. According to Morgan Stanley, “gold has maintained its value over time, offering investors insurance during periods of economic turmoil.”
On the other hand, US Treasury bonds are considered one of the safest assets. Their support by the government of the North American country gives them a particularly attractive solidity during market turbulence. Citigroup in a recent report states that «Treasury bonds can offer a safe haven, in addition to a fixed income, in times of volatility.»
3. Long-term investment strategies
Patience and a long-term perspective are vital during periods of volatility. Warren Buffet, one of the world’s most successful investors, frequently emphasizes the importance of maintaining a long-term view.
Investment banks agree that reacting hastily to short-term market fluctuations can be detrimental to the long-term health of our investments.
Vanguard suggests in this regard that «investors should resist the urge to make significant changes to their portfolios based on near-term market conditions.» Instead, it is recommended to focus on long-term investment objectives, ensuring that the portfolio is aligned with these objectives and readjusting it as necessary, but always with a focus on the planned investment horizon.
4. The importance of liquidity
Maintaining an adequate liquidity position is crucial to managing volatility. This means having enough capital in easily accessible forms convertible to cash, such as savings accounts or money market funds, to cover financial needs without needing to liquidate investments at an inopportune time.
A BlackRock report notes that “having a reserve of cash or liquid investments can provide the flexibility needed to manage expenses without disrupting the overall investment strategy.”
This liquidity can also be leveraged to purchase assets at depressed prices during market declines, which can improve long-term return potential.
5. Use of derivatives as a hedge
An advanced strategy to protect investments against volatility is the use of derivative instruments, such as options and futures, to hedge existing positions.
These instruments can help investors lock in selling or buying prices in the future, protecting against adverse market movements. However, it is important to highlight that the use of derivatives involves risks and requires advanced knowledge of financial markets.
“Derivatives can be powerful tools for risk management, but they also add complexity and an additional level of risk to investment strategies,” warns Charles Schwab. Therefore, its use should be carefully considered and preferably under the guidance of financial experts.
6. Stay calm and do not succumb to panic
Psychology plays a crucial role in investing. In times of volatility, it is easy to give in to fear and make rash decisions that can compromise our long-term financial goals.
Vanguard advises to stay calm and remember that volatility is a natural part of the financial market cycle. «The history of markets shows that, after periods of decline, recoveries usually follow that can compensate for previous losses.»
7. Regular portfolio rebalancing
Rebalancing is the process of realigning the weighting of assets in an investment portfolio to maintain the desired level of risk. This usually involves selling assets that have appreciated and buying those that have decreased in value.
As Bank of America comments, “regular rebalancing is crucial to maintaining an investment strategy consistent with the investor’s long-term objectives and risk tolerance.”
This practice not only helps reduce risk, but can also encourage the discipline of “buy low and sell high,” taking advantage of opportunities that arise with market volatility.
