Following the decision of Britain the leave the European Union – known as Brexit – investors have seen market volatility jump.
In Australia, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell by 3.2% on Friday, recovered 0.5% on Monday, was back down again by 0.7% yesterday, and so far this morning is up 0.7%.
Where it ends today and then goes tomorrow is anybody's guess.
The problem for investors is what to do and how to cope with this volatility. The first question you should be asking yourself is can you sleep at night with all this volatility? If not, you may not be suited to investing directly, and might want to consider handing your funds over to a professional fund manager. Either that or consider diversifying your portfolio into other asset classes – as we outlined here.
If you are coping with the volatility, then these three strategies can help you to ride out the crisis.
Do nothing
As many readers following the Motley Fool would know, most of the time the best thing to do is nothing. Sit tight and stay the course, and over the long run, this type of approach has been shown on many occasions to be far more effective than trying to sell out and buy back in.
Consider that the best time to buy stocks during the GFC was at maximum pessimism in early 2009. But if you had sold out before that, how would know that that was the best time to buy back in?
Right size risk
It's possible that your portfolio and allocation to individual stocks has gone out of whack as some shares have soared and others have sunk over a period of time.
To give you an example, my SMSF used to own shares in each of Amcom Communications, M2 Group and Vocus Communications Limited (ASX: VOC). All three were rolled up into one company – Vocus – and at one point became 15% of my portfolio. For some, that might be an uncomfortable position.
Now might be the time to consider rebalancing your portfolio, ditching the weeds and watering the flowers. Dump the stocks that you may be no longer comfortable with, and use the proceeds to buy shares in the companies that are doing well.
It could also be a reasonable time to gradually change your asset allocation to other asset classes. If you are nearing retirement, as an example, you might want to consider reducing your equity exposure and increase your allocation of fixed income securities.
Increase your contributions
Dollar-cost averaging makes plenty of sense during market falls. If you are putting regular amounts of cash to work in the stock market, increasing that amount when markets fall can be a good strategy. And if you aren't contributing any funds to your superannuation beyond your employer's contribution, this could be an opportunity to start – or even increase your savings.
