Managing Volatility In Stock Market

There is always some risk for investors when it comes to buying stocks. The overall market behavior will greatly impact your returns. However, the method you choose to accumulate stocks over time may allow you to mitigate market volatility.

You have two choices to build up a position in a stock: all at once in a bulk purchase or you can buy them in regular increments. The advantage of the bulk approach is that you have a greater amount of capital at work in the market over a longer period of time. The disadvantage is that you may purchase near the pinnacle of a cycle and you may have to ride out an overall decline.

The risk of buying stocks close to a market high can be avoided by investing in a regular manner. You do this by investing every month or quarter. The amount invested can vary. This investment approach is called dollar-cost averaging. When stock prices are low, more shares are purchased and vice versa.

I favor the dollar cost averaging method for speculative stocks. If I want to take a position of say 100 shares in a stock, I will buy in 30% first and then accumulate on the uptrend. This is when I have identified the stock to be on the line of least resistance and it is clearly going to break away. When the company issues dividends, it will also be reinvested back into the stock.

Now, if the stock falls drastically, which means my judgment is wrong (don’t bother about the reason, the market says so) then I cut my losses and sell. I do not like my money to be tied up in such situations. The trick is to come up with more profitable trades than loss-making ones.

When you have been in the stock market a long time, you will develop the knack of getting it right more often than wrong.

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