OVER the past year the European crisis has overflowed into the rest of the global financial markets.
While investors are worried, there are certain strategies that can be followed in order to protect your portfolio.
With all the uncertainty, there is one thing we can be sure of: the stock market will decline and it will rally. This can sometimes feel like you're on a roller coaster, especially if you haven't had a plan to handle the volatility.
In order to stay ahead, the following are some important portfolio tips that investors can consider in the current market environment.
- Stay away from highly volatile sectors. They can seem lucrative at times, but when trading becomes similar to gambling then it is perfectly acceptable to temporarily step aside from these sectors. Mining, oil and financials should be avoided unless the market trend improves. Financial stocks have historically been considered safe, but when there is a financial crisis that could lead into a credit crisis, as we saw in 2008, it is safer to stay away from bank stocks. Although Canadian banks are of the highest quality in the world, if things were to worsen in Europe and a bank or two collapses, then it would be better to avoid all exposure to the financial sector.
- Sell losing stocks or mutual funds. If you own a stock that is down considerably since you bought it and continues to decline you may want to strongly consider selling it. Many investors want to sell their stocks that are doing well to keep profits and hold onto their losers hoping they will go back up. My view is that you need to hold onto your winners, especially the ones that pay dividends and sell your weaker positions. The stronger stocks have probably held up better, and if markets continue to decline then losing stocks will only get worse.
- Own cash. Cash isn't a good long-term investment, but if markets have no direction then it is OK to allocate a certain percentage of your portfolio to cash or money market. After every stock market correction there will eventually be a rally. It is a good idea to have some cash to protect you if markets are falling, but this cash also enables you to take advantage of opportunities when the markets begin to move up again. There will be some great deals out there for those that have the ability to pick them up.
- Get Dividends. There are other sectors that pay great dividends between four per cent and six per cent, which can give your portfolio a buffer when markets are moving sideways. Look at stocks in telecommunications, utilities, pipelines and real estate to increase your dividends without taking on too much risk during unpredictable times.
The stock market has changed, becoming much more volatile, making it increasingly difficult to earn a decent return. In my opinion, it is vital to utilize a proven strategy and incorporate these important tips into your portfolio management to protect yourself during these erratic market conditions.
Lori Pinkowski is a portfolio manager and senior vice president of the private client group at Raymond James Ltd. This column is for informational purposes only and does not necessarily reflect the opinions of Raymond James Ltd. Email: lori.pinkowski@ raymondjames.ca.