3 ways to beat volatile stock markets

On 24 June 2016, London’s stock market woke up to the news that the UK had voted to leave the European Union — and promptly swooned.

The pound slumped to a 31-year low, and the FTSE 100 fell 4.8%. UK-focused stocks were hit hardest in the days that followed, with the UK-centric FTSE 250 being hammered.
 
Another crash occurred in March 2020, as Covid-19 saw much economic activity in the UK shuttered for several months. Having hit 7,674 on 17 January 2020, the Footsie fell to 4,993 by 23 March, as lockdown loomed.

And now, of course, we have Ukraine, coupled to rocketing inflation, an energy crisis, and soaring foodstuff costs.
 
Clearly, these are — well — interesting times in which to be a stock market investor.

Volatility saps returns

The trouble is that all this volatility isn’t just bad for our collective nerves.
 
It causes real damage, too: sapping confidence, and lowering returns.
 
And don’t forget that stock market indices such as the FTSE 100 or FTSE 250 tend to disguise the real pain. Thanks to the overseas exposure of the FTSE 100, London’s premier index will always tend to rise as the value of sterling declines.
 
Moreover, aggregating lots of stocks together in an index tends to sweep a lot of beaten-down businesses under the carpet. The share prices of many hospitality-based businesses are still stuck at mid-2020 levels, two years on — despite much of the Covid doom and gloom disappearing in the rear view mirror.

So what’s an investor to do?

Sadly, history already tells us how a lot of ordinary investors will respond: by cutting and running, deciding that the stock market isn’t for them. 

Or by concluding that they’re not confident in making their own investing decisions, and placing their trust in financial advisors and actively managed funds — with both entailing high costs.

Fortunately, there are better options.

Diversification

First, spread your wealth — and your risks. A portfolio spread across asset classes, industry sectors, and geographic regions will always be more resilient to adversity than a portfolio concentrated on just one asset class, industry sector or geographic region.
 
Yet — as I’ve noted before — most retail investors don’t do this, being over-concentrated on the UK, and on the large businesses to be found in the upper reaches of the FTSE 100.
 
Overseas index trackers — think the S&P 500, for instance — are one way to play this diversification opportunity, but undeniably involve buying into businesses that you might not want to invest in, alongside those that you do want to invest in.
 
And America in particular has plenty of businesses in which investors might very well want to invest in — companies that in many cases have no equivalent here in the UK. Microsoft, for instance. Amazon. Moderna. Alphabet. Nvidia. Tesla. 3M. And so on, and so on.

Germany, France, Switzerland, Singapore, Hong Kong, Australia — in each case, their stock markets hold investable gems.
 
But many investors never think of looking there.

Hold for the long term

Here at The Motley Fool, we’re generally buy-and-hold investors.
 
That’s because investment churn saps performance through trading costs. It’s generally better, goes the logic, to take your time over the selection of a stock, pick decent businesses run by skilled managers, and let them get on with the job of building your wealth.
 
Fast approaching seventy, I’m old enough to remember all sorts of stock market crashes and periods of under-performance — the causes and durations of which are long since lost in the mists of time.
 
What I do know is that markets eventually recover, and carry on heading upwards — carrying our stocks, and investment wealth, with them.

Defensive stocks

So-called defensive stocks are businesses that sell things that people consume whatever the state of the economy. Consequently, they’re businesses that are better able to resist adversity, often while continuing to throw off cash year after year.
 
And those dividends also play a useful role in countering market volatility by bolstering returns, even as markets sag.
 
Particularly when accumulated dividends are reinvested back into the stock market — not necessarily into the same shares, but perhaps new ones, in the interests of diversification.
 
Water companies, electricity companies, food retailers and manufacturers, many real-estate investment trusts, pharmaceutical companies… all of these have strong defensive characteristics.
 
I’m not saying focus exclusively on these sorts of businesses — of course not — but I am saying that it makes sense to consider holding a decent proportion of these, if market volatility is something that concerns you.

Bottom line

Today’s markets are uncertain. No question of that.

But remember the words of Warren Buffett: investors pay a high price for a cheery consensus.

And whatever today’s consensus is, it’s certainly not cheerful.

So the corollary holds: there are still volatility-beating bargains out there.

Happy hunting!