How to manage your portfolio in turbulent market times

Without assessing in detail the current market situation, one could easily say: “There is a lot going on”. We don't know how these topics will play out in the coming months, and nor does the market. Here’s several ways to react to current market conditions across three scenarios – the markets rise, the markets fall, and the market track sideways. 

Up 

Action 1: You sit still and let the market do its job, and that is going up over the long term. If you have cash in your account, you might even consider increasing your positions. The even more opportunistic variant of this would be buying high beta stocks (growth and technology stocks) and the more defensive approach would be buying low beta stocks (such as consumer staples and utilities).  

Beta describes the movement of an individual stock compared to the broader market. A beta value higher than one means that the stock will fluctuate more than the market, and lower than one means it will move less than the market on average.  

An add–on could be selling put options – high volatility, high option premium – on the shares that you would like to add to your portfolio. A short put is the potential obligation to be a buyer at the strike price of the option. 

Action 2: If you are comfortable with your portfolio as it is, you do not need to take any action. But if you are not that comfortable, you might consider keeping the same exposure in the market but with lower beta stocks in your portfolio. It could also be swapping from single stocks to ETFs to diversify your portfolio. 

Down 

Action 1: You are convinced that we have not seen the worst, and sell all your holdings and maybe even take a short position in the market. The short position can be created with inverse ETFs, short futures, by shorting a CFD index, or by buying puts (or put spreads). 

Action 2: You think the market will go lower, but you do not feel comfortable with a short position in the market. You will liquidate some of your current positions and will have more cash for the coming period to take advantage of lower prices. The proceeds of your selling can be invested in fixed-income products. You could also sell your current holdings and enter a GTC (Good-Til-Cancelled) buy order at a much lower level. 

You can also sell your current holdings and at the same time sell puts with a (much) lower strike price, giving you the potential obligation to buy the shares back. If this materialises, you would have skipped a big part of the decline. 

Sideways (or unsure) 

Everything is possible from here. It can be up, down or sideways: “I just do not know”. The question is how to act if you do not have a strong view about what might happen in the coming months. This does not mean you have to leave the market entirely. It is more about positioning your portfolio towards the current market situation.  

• What is your investment horizon? The longer it is, the less necessary it is to take immediate action. 

• What would happen if the market went down another 25%? If this scenario gives you the creeps, it would be good to at least reduce your exposure. 

• Is your portfolio leveraged? If this is the case, it would mean that a falling market could really hurt you. So reducing your leverage is a must do. 

• Does the current market have a strong negative impact on your emotional wellbeing? Then you could reduce your position in the market or protect your holdings via short index futures or long index puts (or put spreads). 

• How well-diversified is your portfolio? If you are a hard-core stock investor, and you want to stick to that, then it is nevertheless wise to consider if you should increase diversification in your portfolio, including potentially across asset classes to fixed income, gold, or real estate. 

Investing is about climbing a wall of worry. What makes it even harder to act, however, is the fact that you know upfront that you will never do the perfect trade. If you reduce your exposure and the market goes up, you feel you have missed part of the increase. If you stay fully invested and the market tanks, you will ask yourself how on earth you could possibly have been that naive. In other words: you will never do the perfect trade. That does not mean that you should sit still and do nothing. It all depends on your underlying view on the market, your time horizon, your risk tolerance and your overall emotional wellbeing. Take all of this into account, and adjust your portfolio accordingly.