What's happening: Markets both in Australia and abroad have been experiencing wild swings in trade of over 1%. In the past month the S&P/ASX 200 (INDEXASX: XJO) has lost 5.6%.
The Commonwealth Bank of Australia (ASX: CBA) one of the largest and most widely held stocks by the investing public has slumped over 10% from its recent highs in early August.
The USA has sent troops back to the Middle East, Russia continues to strong arm Ukraine, the Ebola virus continues to spread – in short geopolitical risks are elevated across the globe and at some point the U.S. Federal Reserve will have to raise rates!
So what: While investors want to avoid getting too caught up in predicting the next crash, that doesn't mean you can't to maximise the return potential of your portfolio.
Take gold stocks for instance…
Somewhat surprisingly, gold stocks have not been rallying to the extent one would expect considering the heightened global volatility.
On Tuesday, however, gold stocks did rally – EVOLUTION FPO (ASX: EVN), Northern Star Resources Ltd (ASX: NST), Medusa Mining Limited (ASX: MML) and Resolute Mining Limited (ASX: RSG) were the four biggest gainers in the S&P/ASX 200 index with share price gains of 8.3%, 7.1%, 5.6% and 5.1% respectively.
This was a strong rally but arguably not unjustified and potentially far from over.
Now what: The Australian Financial Review ran the headline this week 'Get ready for a sharemarket crash.' While sentiment appears to be turning and arguably global markets are overdue for a pullback that doesn't mean investors need to be scared.
It also doesn't mean investors have to sit on their hands and watch their portfolios decline in value. Proactively positioning your portfolio with downside protection is a completely reasonable strategy. This could involve deciding to hold a higher cash weighting, or it might mean selling stocks in your portfolio that you think are fully or over-valued, or it could mean 'hedging' your downside risk in some form such as through gold.
Whatever you do or don't do there are obviously risks and rewards. Historically gold does well in bear markets and likewise the opportunity to buy stocks at depressed levels is obviously a winning strategy but requires cash to execute successfully.
