With all the chaos of inflation and rising interest rates engulfing the economy, it’s no surprise the stock market has been volatile. Worse, panic-driven volatility typically leads to more panic, in a vicious cycle that can send almost any investment portfolio into a tailspin.
However, as unpleasant as this situation is to experience, it also creates a breeding ground of opportunity. Panicking investors don’t make good decisions. And, consequently, some terrific companies can end up falling off a cliff for no valid reason, allowing smart investors to capitalise and profit on the eventual recovery.
With that in mind, let’s explore three tactics investors can deploy to profit from all the current chaos.
1. Focus on the long term
It’s easy to be distracted by immediate threats to the economy or a group’s operations. Supply chain disruptions can severely cripple even an industry leader’s revenue stream. However, providing management was smart enough to have a cash war chest that covers its short-term financial needs, these disruptions, while frustrating, are ultimately irrelevant.
In the short term, the stock market is a mess of randomness. It’s only in the long run that share prices begin to reflect the quality and value of the underlying business. And as a long-term investor, the latter is all that matters.
Buying high-quality shares at discounted prices is the definition of ‘buy low, sell high‘. And while it will likely be a bumpy ride, holding a top-notch enterprise delivering both growth and value to shareholders is a proven strategy for building wealth.
2. Diversify
Some of the best businesses today may not stay that way. Industry titans are constantly threatened by disruptive start-ups trying to take their place. And a seemingly oversold, high-quality enterprise primed for recovery may never achieve it.
This is where diversification comes into the picture. A concentrated portfolio lends itself to having potentially higher returns. However, this also amplifies risk. The impact of one firm failing is far greater in a concentrated portfolio versus a diversified one.
And that’s why when investors first start injecting capital into the financial markets, an advisor will often instruct them to never put all their eggs in one basket.
3. Buy defensive businesses
Not every investor has the stomach for volatility. Watching a position drop by double of digits in the space of a few weeks is a gut-wrenching experience. And for those who don’t want to risk losing sleep, defensive stocks may be the ideal refuge.
These companies will most likely only deliver modest returns with some dividends every now and again. While it’s not as exciting as the prospect of beating the market’s average return, not every investor is trying to grow wealth. There are plenty of those more interested in protecting the wealth they’ve already accumulated.
