I'm sure that the last few weeks have given investors a bit of a scare. The S&P/ASX 200 Index (INDEXASX: XJO) did technically enter into a correction, which is a fall of 10% or more from a previous high.
Now I don't put much stock in these kinds of turns, but there's no doubt the share market got a case of the wobbles last week and it's never fun seeing your own portfolio lose a significant chunk of its value on paper.
Some investors might be happy to ride out the volatility – it's a normal part of investing in the share market after all. And in many cases, it's the right thing to do for your future. The only alternative is selling shares, which is not a good solution for preserving your wealth under most circumstances.
But for those investors out there who can't tolerate the kinds of volatility we've been seeing (such as retirees or capital-conscious investors), there are other options. These options are difficult in themselves as record-low interest rates have altered the playing field somewhat.
But still, they are there. Here are three:
ASX shares with a long history of paying dividends are a great way of insulating your portfolio. Shares like Woolworths Group Ltd (ASX: WOW), Transurban Group Ltd (ASX: TCL) and Telstra Corporation Ltd (ASX: TLS) all have a beta below 1, which means they are usually less volatile than the overall share market.
The healthy dividends you can expect to receive from these companies will also help bolster your returns in times of volatility.
Use alternative asset classes
Some assets outside shares have something of an inverse correlation with the share market – meaning they usually go up if shares go down. Two of these are gold and government bonds and you can access both through exchange traded funds (ETFs) on the ASX.
Either the iShares Core Composite Bond ETF (ASX: IAF) or the ETFS Physical Gold ETF (ASX: GOLD) are good choices here in my view. You won't get the highest levels of income from these asset classes, but they can serve a useful role in capital protection in a portfolio, nonetheless.
Cash is king
Holding cash is the ultimate protection against volatility. Not only will your cash cushion stay safe in a share market downturn, but you might even be able to use to it pick up some of your favourite shares for a great price!
Again, low interest rates mean your cash won't be making you rich while you wait, but it is still a useful tool in managing portfolio volatility during uncertain times.
There is no silver bullet when it comes to protecting your portfolio from volatility – every asset class and share has its benefits and detractions. And there is no free lunch when it comes to the risk/reward spectrum. But having a healthy mix can help mould your portfolio to your own needs and help protect your capital if that's your priority.