At the end of last year, I wrote about why I thought 2022 could see high stock market volatility. At that point in time, I thought this was going to be driven mostly by Covid-19 and difficulties in coming out the other side of it. Yet after two months, the volatility has come more from central bank actions and war between Russia and Ukraine. With markets whipsawing around several percent during a day, here’s how I can protect my portfolio.
Making use of orders
On way I can benefit from high stock market volatility is by thinking ahead and placing an order to buy the stock I want at a specific price. For example, let’s consider Lloyds Banking Group shares over the past week. On Thursday, the share price fell almost 11% to drop to levels not seen since last December just above 46p. On Friday, the shares bounced back 6.8%.
In the knowledge that the market was going to be choppy, I could have placed an order to buy shares in Lloyds if it dropped below 50p. Or I could have placed it at 48p, 47p or wherever I wanted. The main point is that if I’m patient, high volatility could give me the chance to buy stocks on my watch list at a better price than currently on offer. This move might only happen in the space of a few hours, so placing an automatic order to execute on my investing platform is a smart move in my opinion.
However, I do need to be aware that there’s the risk that the market might not reach the specific level I’ve placed my order.
Using market volatility for dividends
A second point I can make use of is buying dividend shares when the yield is attractive. The two parts that make up the dividend yield of a stock is the dividend per share and the share price. Let’s say the dividend per share has stayed the same for a while, at 5p. If the share price is 100p, then the yield is 5%.
What if I liked a specific company but really wanted a yield higher than 5%? A volatile market can give me this opportunity. From doing my homework, I can calculate that if the share price drops to 82p, then the yield will jump to 6%. With this is mind, I can keep an eye on the share price, and if a sudden slump occurs, I know exactly what I need to do.
Sticking to defensive stocks
If I want to simply to try and ride out the high stock market volatility, I can consider buying some defensive stocks. I detailed four of my current favourite defensive stocks here.
In short, consumer goods brands such as those owned by Unilever and Reckitt should be able to help me navigate stormy markets. This is because the products they sell are necessities for many people. Therefore, regardless of the situation around the world, consumers will likely keep buying them, helping to maintain revenues for the firm.
Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Lloyds Banking Group, Reckitt plc, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
