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Market Volatility Strategy

Moneyzine Editor
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Moneyzine Editor
1 mins
February 8th, 2024
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Market Volatility Strategy

Definition

The term market volatility strategy refers to the approaches investors can take when the market is rising or falling in relatively short timeframes. Market volatility strategies start with the construction of investment portfolios that match the individual's risk profile.

Explanation

A market, or industry, is said to be volatile when it is rising or falling in relatively short timeframes. Typically, statisticians will state volatility in terms of the standard deviation of an investment's return. The standard deviation measures the range of returns around the average; therefore, larger standard deviations mean more volatility. For example, the returns associated with the stock market will have a larger standard deviation than those of a money market fund.

While sudden increases in the value of a portfolio are welcomed by an investor, a sudden downturn can be worrisome. There are several ways to lower the risk of a portfolio; however, the most important step is to build one that matches the investor's risk tolerance score. Other strategies include:

  • Diversification: includes building a portfolio that includes equities (common stock), fixed-income securities (bonds), as well as stable value investments. Diversification also includes owning securities across a number of industries.

  • Investing Over Time: also referred to as dollar cost averaging, this strategy involves purchasing securities over relatively long timeframes. This can sometimes be accomplished through regular payroll deductions.

  • Bond Laddering: involves the purchase of fixed-income securities with staggered maturity dates. Laddering helps investors to manage interest rate risk, and provides them with the opportunity to make a series of reinvestment decisions over time.

Related Terms

  • Capital Growth Strategy
    The term capital growth strategy refers to the creation of an investment portfolio that seeks to maximize value in the long term. A capital growth portfolio will allocate more than half of the fund's assets to equities.
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  • Dynamic Asset Allocation (DAA)
    The term dynamic asset allocation refers to an investment approach that actively rebalances the assets in a portfolio in response to market conditions. Dynamic asset allocation typically involves moving the funds from one asset class to another based on the portfolio manager's longer-term performance expectations.
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  • Defensive Investment Strategy
    Investments do bring profitable returns to investors, but these are associated with some form of risk that may incur losses to investments. A defensive investment strategy saves investors by minimizing these losses and rebalancing the portfolio.
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  • Aggressive Investment Strategy
    The term aggressive strategy refers to building an investment portfolio that attempts to increase returns by purchasing a larger proportion of higher-risk securities. It typically involves allocating a large portion of the portfolio's funds to equities.
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  • The term strategic asset allocation refers to an investment approach that rebalances the allocation of assets in a portfolio to achieve a long-term target. Strategic asset allocation typically involves moving the funds from over-performing asset classes to those that are underperforming.
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