It’s been a rough year for FTSE 250 shares. Following the ongoing uncertainty surrounding the economy, the index has seen its level plummet by nearly 30% since 2022 began (and 25% over 12 months). That’s considerably more volatility than the FTSE 100 has experienced by comparison. Although the latter does house larger enterprises that are proving more resilient to rising interest rates and inflation.
Yet, a double-digit decline in a stock market index is pretty rare. And while it’s unpleasant right now, history has shown countless times that buying when stocks are cheap is a recipe for long-term wealth generation.
That’s why I can’t help but see this price correction as a golden opportunity to snatch up some bargains for my portfolio.
Investing in the FTSE 250 during volatility
Regardless of what the economy is doing, the core principle of long-term investing remains unchanged. Buy and hold high-quality businesses with talented management and robust balance sheets. The latter is crucial right now since rising interest rates make access to external capital far more expensive than a year ago.
However, we’ve seen that even the most financially sound companies have been caught in the panic-selling crossfire lately. And with further political uncertainty surrounding the British government, this volatility may not be going away anytime soon.
Therefore, even if I find some of the best beaten-down FTSE 250 shares to buy today, these stocks may continue to tumble further. That’s why I believe deploying a pound-cost-averaging buying strategy is paramount.
Instead of investing all my capital in one lump sum, I have and will continue to drip-feed capital into my investments over several months.
Why? Because suppose the stock prices of these terrific businesses continue to fall on the back of emotionally-driven decision making? In that case, I retain the financial flexibility to capitalise on even better prices for my portfolio, bringing down my average cost basis. Moreover, this tactic also improves my odds of buying when the stock market eventually hits the bottom rather than trying to pinpoint the exact date.
Managing risk
Beyond spreading my buying activity, diversification is another risk-reduction strategy to protect my portfolio during these volatile times.
No matter the size, every company in the FTSE 250 has to overcome challenges and threats. And not every business will be successful. Just take a look at what happened to Cineworld. The world’s second-largest cinema chain collapsed despite being a thriving growth stock just a few years ago.
Whether it’s an external force like a global pandemic or an internal problem like a lost contract, diversification helps my portfolio absorb the impact of failure. And with the cost-of-living crisis sending consumer spending off a cliff, the risk of failure is undoubtedly rising today.
Having said that, by maintaining a diversified portfolio of high-quality shares and taking advantage of dirt-cheap valuations, I improve the odds of achieving impressive long-term returns for my portfolio.