5 ways to prepare for a volatile share market

Local shares plummeted almost 2% yesterday. Before that, however, shares did fall as much as 3.9%, likely tempting even some of the most experienced investors to sell their shares in response to Trump’s potential presidential election win.

Today, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up 148 points.

You read that correctly. After yesterday’s sudden sell-off, the Australian share market has risen close to 3% today, following the lead set by international markets overnight.

It acts as a timely reminder for investors as to why it can be such a bad idea to sell your shares in a state of panic.

The details of what a Trump presidency looks like are still unclear. However, he won’t take power until late in January, with current President Barack Obama promising to deliver a smooth transition for Trump. Likewise, Trump’s victory speech was more gracious than what many people expected, which likely provided some comfort to global markets.

At the height of yesterday’s panic, however, we cautioned investors: ‘Whatever you do, don’t sell out now.

Following that advice can be incredibly difficult to stomach when virtually every share in your portfolio is falling and when uncertainty is so great, but it pays to remember that the sellers are selling in a state of panic at that time.

They’re offloading shares at what can be irrationally low prices, simply for the benefit of a little bit of peace of mind.

Today, widely-held companies such as BHP Billiton Limited (ASX: BHP) and Australia and New Zealand Banking Group (ASX: ANZ) have recovered their losses. They’re up 8.6% and 3.7% respectively.

Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) are up 4% and 3% respectively, while QBE Insurance Group Ltd (ASX: QBE) and CSL Limited (ASX: CSL) have regained 9.1% and 5.2%.

By comparison, those investors who flocked to the gold miners (boosting some of their shares by more than 10% yesterday) are now paying the price. EVOLUTION FPO (ASX: EVN) is down 7.8% and St Barbara Ltd (ASX: SBM) is down 8.3%.

This note isn’t to suggest that the market panicked over nothing. Share markets around the world could well remain volatile for some time, and investors do need to prepare for that.

Here are a few ways you can do that:

  • Commit to the businesses you own. Think of them not as three-lettered ticker symbols that go up and down on a daily basis, but as cash generating businesses you bought based on the belief they will be bigger and stronger in the future than they are today.
  • Know your companies. Familiarise yourself with their operations and what makes them attractive.
  • Ensure you’re comfortable with your holdings. ‘Not panicking’ doesn’t necessarily mean ‘hold onto the shares you own for dear life’. Selling in a state of panic isn’t a good idea, but if yesterday’s sell-off made you appreciate the risks facing one of your businesses, or made you realise you aren’t comfortable holding those particular shares, perhaps exiting that position wouldn’t be a bad idea.
  • Ensure you hold cash. Cash is important as it diversifies the blow of a falling share market. Even in this low interest rate environment, it’s best to have some cash on the sidelines.
  • Be prepared to buy. Not everyone will be comfortable buying shares in a falling market, faced with heightened uncertainty. That’s okay. Others who are more comfortable with accepting risk, however, should be on the lookout for bargain opportunities, which could generate strong gains over the coming years.

We’ll likely grow more familiar with what a Trump presidency will look like over the coming weeks and months. That could create volatility, or it could make shares rise – just as they have today. Unfortunately, we won’t know which direction the market will take, but it’s important to be prepared for either event.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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