Want to know how to protect your share portfolio during this volatility? Don't panic!
Volatility is just part of the process when it comes to shares. Most days buyers and sellers are willing to transact at a price similar to yesterday's price. Occasionally there are days where there are big differences, up or down.
It's impossible to stop your portfolio falling completely. You can't control what other investors are willing to buy or sell their Afterpay Ltd (ASX: APT) shares for, or CSL Limited (ASX: CSL) shares, or any other share. If people just want to sell out then you can't help it. I'm not a fan of options either.
Here are some things to think about:
Your wealth only goes down (or up) on paper
If you get too involved in watching your share portfolio move in value each day then you may end up thinking you are actually gaining or losing that much money. The underlying business value doesn't actually change that much day to day.
The share market's liquidity is a blessing in disguise. It gives you the opportunity to sell your shares whenever you want at the price the market is willing to pay that day. It also gives you the opportunity to buy shares at whatever price the market is willing to sell at.
You only truly "lose" money if you sell during times like this. Buying high and selling low is not a good strategy. It's much better to buy low.
You should always have a bit of cash on the side
People shouldn't have more money in shares than they are willing to see exposed to occasional volatility.
Having an emergency fund is important to give you the financial foundations so that you can invest more freely in growth assets like shares. How much of an emergency fund? That's up to you. I'd suggest at least $1,000. But the usual financial advice is three to six months of living expenses.
I also think it's always a good idea to have a bit of investing cash – perhaps one regular investment amount – so that you can take advantage of times like this.
Quality is best, particularly in times like this
People don't say to invest in quality just for the fun of it. Having durable businesses is important for times like this, which is part of the business cycle occasionally. Having a respected brand is important. Having a good balance sheet is integral to navigate through events this, usually that means having a balance sheet at least in a net cash position. No debt at all would be better.
Shares like Altium Limited (ASX: ALU), Pro Medicus Limited (ASX: PME) and A2 Milk Company Ltd (ASX: A2M) are all the types of businesses that fit a 'quality' description.
Foolish takeaway
As Thursday's price movements showed, there are some days where almost every share will drop and there's nothing you can do. What you can do is make sure you're set up with good finances leading up to it with a good mindset and a plan about how to take advantage of the lower share prices.
