How to capitalise on volatile stock markets

With stock prices being highly volatile at the present time, it seems likely that this could be a continuing theme for the remainder of the year. Certainly, there is still a very long way to go until 2019. However, investor sentiment appears to be changing rapidly, and this could mean stock prices do likewise.

A new era?

Of course, one reason for volatility in stock prices is the potential for a new era. In some ways, it may already have started. The bull market of recent years has been built upon the availability of cheap money that has helped to drive demand higher for a wide range of assets. Low inflation has meant that while monetary policy has been exceptionally loose, it has not caused instability for the global economy. As such, policymakers have been able to stimulate global growth through lower interest rates for longer than most commentators predicted at the time of the financial crisis.

However, the era of cheap money now appears to be coming to an end. In the US, there have already been multiple upward movements in interest rates. This trend looks set to continue and may be mirrored in Europe over the medium term. With an aggressive fiscal policy set to be delivered in the US, the prospects of higher inflation could be a real threat to economic stability. In turn, this could prompt higher interest rates, which could choke off the performance of the US economy and global stock markets.

Psychological strength

With the near term prospects for stock prices being uncertain, investors may wish to prepare themselves for a volatile year. This could be a good first step in overcoming the challenges which come with sharp movements in company valuations. If an investor is anticipating paper losses, then it can make it easier to live with them. And by preparing for volatile markets, a cash pile may be on hand to take advantage of the situation.

Indeed, being able to capitalise on volatile stock markets could be key to overcoming them. When markets are falling, it can be a bruising experience. Paper losses often feel like they are permanent in nature, while it can be difficult to overcome fear and invest in what appear to be undervalued companies.

However, doing so could be a shrewd move. One way of achieving this is simply to look 5 years ahead when making any decision. In that time, the performance of the economy is likely to be more stable and potentially offer greater growth prospects. In focusing on the long term, an investor may be able to think more objectively and avoid becoming focused on the day-to-day price movements of the index, which is never a helpful action to take.

While doing so may require psychological strength, preparation and managing expectations could be key to success. By focusing on the long run and accepting volatility as part of the investment 'game', it may be possible to benefit from it in future.