Investing in the stock market comes with its fair share of volatility. However, there are strategies you can employ to navigate through these uncertain times and protect your investments. One approach is to adjust the asset mix in your portfolio.
To reduce volatility, consider increasing the amount of cash in your portfolio. By allocating more funds to high-interest savings accounts or Guaranteed Investment Certificates (GICs), you can minimize exposure to market fluctuations. These cash investments are ideal for short- to medium-term financial needs. It is also wise to establish an emergency fund of a few thousand dollars to avoid tapping into your long-term investments during unexpected situations.
Including bonds and preferred shares in your diversified portfolio can also help manage volatility. These types of investments generally experience lower volatility compared to common stocks. Bonds and preferred stocks are impacted by changing interest rates, and dividends or coupons must be paid to their holders before payouts are made for common stock.
Controlling volatility within your common stock portfolio requires selecting stocks from different industries that are exposed to varying risks. Holding quality stocks that are not correlated reduces the impact of industry-specific volatility. It is advisable to choose one or two stocks from key industries such as banking, utilities, telecom, technology, healthcare, consumer staples, consumer discretionary, and real estate. Additionally, target these stocks at attractive valuations.
Investing in dividend stocks can also help limit volatility. Stocks with decent dividend yields and a history of increasing their dividends attract long-term investors, which can add stability to your portfolio. Another strategy is to focus on low-beta stocks, which have lower volatility than the overall market.
One example of a low-risk investment that hedges against market volatility is Franco-Nevada (TSX:FNV). Franco-Nevada is a gold-focused royalty and streaming company with a diverse portfolio of cash flow-producing assets. With a beta of 0.6, this gold stock has shown lower volatility than the broader market. Over the past 10 years, Franco-Nevada has delivered impressive annualized returns of 16.8%, outperforming the market’s returns of 8.3%.
Furthermore, Franco-Nevada has consistently increased its dividend for 15 consecutive years, with a solid 10-year dividend growth rate of 9.0%. With numerous producing assets, advanced-stage projects, and exploration opportunities, the company offers plenty of growth potential.
In conclusion, by adjusting the asset mix, diversifying across industries, investing in dividend stocks, and targeting low-beta stocks like Franco-Nevada, you can better weather volatility in your investment portfolio. These strategies can help minimize risk and enhance long-term returns.
– Volatility: The degree of variation in price or value of an investment.
– Asset mix: The combination of asset classes (such as stocks, bonds, and cash) in an investment portfolio.
– Guaranteed Investment Certificates (GICs): A type of investment in which you lend money to a financial institution for a fixed period and earn interest over the term.
– Preferred shares: A type of stock that has a higher claim on the company’s assets and earnings than common shares, typically with fixed dividends.
– Common stock: A type of stock that represents ownership in a company and carries voting rights.
– Beta: A measure of a stock’s volatility in relation to the overall market.
– Dividend: A payment made by a corporation to its shareholders, usually from its profits.
– Dividend yield: A financial ratio that indicates the annual return on an investment based on the dividend income received.
– Valuation: The process of determining the worth or value of an asset or company.
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