While many investors may fall victim to the low volatility that is present in the market, savvy investors know that the stock market rarely stays in the same mood for long periods of time, making it reasonable to believe that volatile trading sessions may soon return. That makes it imperative that traders have a plan for what they'll do when the market🔜, again, becomes tough to navigate.

What Is Volatility?

Volatility is a measure of the dispersion of returns for a security or market index. More simply put, volatility represents how large an asset's prices swing around the mean price. There are several ways to 澳洲幸运5官方开奖结果体彩网:measure and calculate volatility, with the most simplified and commonly used historical performance indicator called a 澳洲幸运5官方开奖结果体彩网:histogram.

Volatility is something investors are always considering when making investments as volatile assets are generally riskier than assets that experience less deviation from the mean. This concept shapes a significant amount of investor portfolios. It is common to see younger people with more aggressive portfolios that can absorb volatility over a long time frame. It's the opposite for investors nearing or in retirement who eschew volatility in favor of more predictable, less deviating investments.

There is a volatility index called the VIX which was created in order to gauge the expected 30-day volatility of🦂 the U.S. stock market. Investors who trade o𒆙n a more macro approach, investing more in broad ETFs and large indices versus individual securities, will often watch the VIX. A higher VIX means volatility is high, and the market could experience significant price movements. A lower VIX would mean the opposite.

There are some other measures of volatility that may reduce deviation in an investor's portfolio, which are listed below.

Beta

All stocks have a measure of volatility called beta. This metric can often be found in the 澳洲幸运5官方开奖结果体彩网:fundamental analysis section of the stock's informati𝄹on page. A beta of one means that the stock will react in tandem with the S&P 500. If the S&P is down 0.5%, this stock will be down the same amount. If the beta is below one, the stock is less volatile than the overall market and a ꦅbeta above one indicates that the stock will react more severely.

The best way to reduce the volatility in your trading portfolio is to sell high beta stocks and replace them with lower beta names. You might really like your John Deer💯e stock, but in times of high market volatility, it might wildly fluctuate. Swappi📖ng it out with a lower beta stock like Johnson and Johnson would lower the overall volatility of your portfolio.

Traders o൩ften adjust the volatility of their portfolio as the overall market sends different signals. When it is going up, they increase the beta.🐭 When it is in correction mode, lower beta names help to preserve capital.

Hedging

Hedging involves initiating shꦿort positions against your long positions. Let's say that you're holding 100 shares of Qualcomm stock but you believe the market is ripe for a correction. You could short sell 100 shares of a high beta, overvalued stock that would fall at a higher rate than the overall market if a correction occurred. Then, you could cove🐲r the short position later when you believe that the market is going to see a recovery. You might have lost money on your Qualcomm position but you made money on the short position.

Bonds

When traders have a high degree of risk appetite, they don't hold a lot of 澳洲幸运5官方开奖结果体彩网:fixed income products, but when the market becomes questionable and they want to find safe 🍒havens for their money that won't have severe reactions to overall market moves, they may head for the bond market. Bonds, bond ETFs and treasuries all serve as safe havens when the market is going down. Not only does it reduce volatility, but it still allows the trader to bring in income.

Diversification

澳洲幸运5官方开奖结果体彩网:Diversification is one of the simplest and most important part🐎s of volatility control. Much like the proverbial "don't keep all your eggs in one basket," diversification helps protect your portfolio by spreading out the risk.

Timing the market is difficult, and even more so with individual securities. In a diversifꩵied portfolio, a mix of different asset types and investment vehicles helps to limit being overexposed to any one sector or commodity. These can be further spread out by mixing both domestic and international holdings.

The strategy is considered almost a necessity to a well-balanced portfolio that aims to weather market downturns. If you only own one stock and it falls 20%, your portfolio falls 20%. If you own two stocks and one falls 20%, your portfolio averages out to only a 10% correction. Many portfolios own ETFs that track indices containing hundreds or thousands of stocks, and it is not unusual for an investor's portfolio to be diversified over multiple market segments, built on thousands of underlying securities.

Dividend Investing

Although less popular than broad diversification, dividend investing can be used as an additional safeguard for vo𒐪latility. When you invest in dividends, portfolio fluctuation decreases as typically dividend-issuing securities pose somewhat more predictable returns. Investors know that the dividend portion is usually paid and thꦿere is less risk. This knowledge helps to stabilize the security.

However, since the risk and volatility can be lower, the return can also be lower than more volatile offerings. Over time though, reinvested dividends can purchase additional shares of the same security,♑ reducing ri✱sk over a long enough time frame.

Cash

The easiest way to reduce the volatility in your portfolio is to sit out. Selling your positions and going to a higher allocation of cash completely shields you from short-term market fluctuations. Staying in cash for long periods isn't advised, since the money is falling victim to 澳洲幸运5官方开奖结果体彩网:inflation, but for tr𓄧aders who believe the market will soon stabilize, cash is the easy ෴way to mitigate losses.

Responding to volatility may be a necessity for long-term investors. Temporary pops and drops in the market don't change the long-term objective of your portfolio, making it unnecessary to change your holdings. Stay the course and know that history shows that the market always recovers.

The Bottom Line

Reducing volatility in your portfolio can be simple or complex. One of the most popular strategies to reduce volatility is to widely diversify a portfolio while keeping a small percentage in cash. Volatility is measured based on a security's historical price movements and one of the major considerations of investors when placing trades.