7 tips for buying shares in volatile markets

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7 tips for buying shares in volatile markets

Volatility and share investing go together like honey and crumpets.

As a share investor, how can you use volatility to your advantage? And how can you ensure volatility doesn’t derail your strategy to build wealth and gain choice in life?

I’ve invested through the GFC, the Asian Currency Crisis, September 11, the Japanese tsunami, Brexit, numerous North Korean nuclear threats, and plenty more share market upsets. Here’s my top 7 tips for investing in shares through volatile times:

1. Get your time frame right
2. Build a robust helicopter view
3. Sectors vs stocks
4. Dollar Cost Averaging
5. Understand the numbers, and their limitations
6. Embrace risk
7. Obsession is not helpful

Let’s explore each of these in some detail.

1. Get your time frame right

Be an investor, not a speculator.

Investors build portfolios that grow in value over time and throw off regular income via dividends. They buy into companies or sectors that they believe have good long-term economic prospects. They choose to become an owner so as to participate in that growth.

Speculators only care about short term price movements. The prospects of the underlying business are irrelevant because they won’t be holding the shares long term. In and out, with the shorter the time period the better.

Speculation sounds exhilarating, but for investors like you and me, we’re likely to have more success betting on black at the casino.

There are several reasons for this. To start, there are institutions and hedge funds that have enormously powerful computers doing automated trades in fractions of a second. They are constantly monitoring markets and jumping on any short-term mispricing opportunities faster than you could blink.

Next, you have transaction costs. Brokerage has fallen massively in the past decade, but it’s still not zero. The more you trade, the more your brokerage costs add up. You then need to make enough profit to cover these costs, before seeing any gains for yourself.

And finally, there is tax. Assuming you do have some successes, you’ve got to share every win with the tax office. A long-term investor will have to pay tax one day, for sure. But tax on any gains made isn’t payable until you sell. So if you sit on a share for 10 years, 20 years, or more, you’ll be collecting dividends on money that rightly belongs to the tax man.

In volatile times especially, remember, you’re an investor. You don’t care what the price is in 5 months’ time, what you care about is the price in 5 years’ time.

In chapter 5 of Financial Autonomy – the money book that gives you choice, we explore this in greater detail under “Investing vs Trading”. Grab a free sample here.

2. Build a robust helicopter view

In times of volatility you need to understand what’s going on. Why is the market volatile? What are the drivers?

Read broadly. Be curious. Develop what I call a helicopter view – a high level view of the world and investment markets. Read the business sections of the newspapers, specialist publications like the Economist and Fast Company, and watch Youtube channels like The Compound.

We’re in a very fortunate position today where different perspectives are available at the tap of a few keyboard taps.

Armed with this broad understanding, you can filter out the traps and identify the opportunities. You likely won’t get it right all the time – that’s why we diversify – but in today’s information age, there’s no excuse for ignorance.

3. Sectors vs stocks

Armed with your robust helicopter view you might start to see individual stocks where their price has been hit beyond what seems logical. In sharp sell offs, usually everything drops, good and bad. Well informed investors, with a longer-term time frame can often identify attractive opportunities.

Often it is at the sector level where opportunities become evident. During the coronavirus pandemic, transportation and especially airlines had it tough. The healthcare sector though saw gains. The global tech sector performed well, as did consumer staples. Commercial property, especially shopping centres were hit hard.

The growth in ETF options available to investors allow sector bets to be placed. In volatile times this can be a good way to go as the ETF’s have in-built diversification across typically 100+ underlying companies. If you formed a positive long-term view on the tech or healthcare sectors for instance, there are ETF’s available that could gain you exposure to this theme, without the need to identify specific companies.

You could even invest into specific geographic regions, or particular themes, depending on the event that led to the volatility.

The takeaway is, you need not drill down to individual shares when searching for investment opportunities during volatile times. ETF’s provide the opportunity to invest at a higher level, without the single stock risk inherent in individual share selection.

In module 4 of Investment in Shares with Confidence, we explore ETF’s in detail. Find out more here.

4. Dollar Cost Averaging

Wouldn’t it be great if someone sent you and only you a personalised message advising the market had hit the bottom and it was all up from here?

Sadly, that message is never coming. We only know the bottom of the market with hindsight. And having invested through several volatile periods my observation is that there tends to be nothing remarkable at all about market bottoms. No significant news stories or global events. Instead the desperate sellers have eventually sold what they wanted to sell, and the buyers become the majority.

You can’t pick market bottoms. Sitting on the side lines during volatile market periods means you’re looking for the bottom. But this is a proven losing strategy.
A better approach is Dollar Cost Averaging. Buying on a regular basis, most typically monthly, and accepting the average price over time. Sure, you won’t get all of your money in at the bottom of the market, but you will get some in (there abouts), and plenty more at prices that will look very good 5 years down the road.
Don’t be the person who’s still sitting in cash 3 years after a market fall, waiting for it to drop again. Invest progressively and accept the average price.

5. Understand the numbers, and their limitations

Particularly if your strategy is to buy individual shares, numbers such as PE Ratios and Dividend Yields are likely to be key inputs into your decision making (tools we cover in Invest in Shares with Confidence).

Whilst these are very helpful in stable market conditions, be aware of the potential for them to lead you astray during periods of economic disruption and market volatility. This is because the numbers are based on historic income or dividends. In times of rapid economic change, profits generated last year might be a poor indicator of what the business will earn in the year ahead.

You might come across a company trading at a PE of 8, and based on this, form the view that it’s a great opportunity. Now it may well be, but it could be that the market is assuming profits will halve over the next few years, and so the price, and therefore the PE Ratio, has dropped to reflect that new outlook.
Likewise, a bank might be showing a 9% yield, which looks extremely juicy in a low interest world. But if that bank cuts or suspends dividends, the yield that attracted you to them will evaporate.

Standard analytical data such as these still remain useful. If a company is trading at a PE of 8, you can consider whether the business’s outlook is quite as bleak as the market seems to be assuming. Just don’t take them at face value during volatile periods. Consider what they are telling you, and then make your investment decisions.

6. Embrace risk

You’ve got savings and you want them to grow. You could put them in the bank and in about a thousand years they will have doubled. Instead you’ve decided to invest in shares because your investment time frame is a little more near term.

You are chasing higher returns. The reason share market investments pay returns higher than cash is because investors need to be compensated for risk.
The main form of investment risk is volatility. You could put $10,000 into a share today, and if you need to sell it next week, you may not get $10,000 back. This is not what happens when you deposit money in the bank.

If shares didn’t exhibit volatility, returns would be similar to bank interest rates.

So rather than be put off by volatility, embrace it. Volatility is what gives you your attractive returns.

Or thought of another way, the panicky reactions of some investors to sell when markets drop, pays for your long-term profits.

(In chapter 4 of Financial Autonomy – the money book that gives you choice, I explore “Are stocks risky?”, and strategies you can use to manage risk. Download a free sample of the book here.)


Related Post: Bike Paths, Bitcoin, and Risk Budgets

7. Obsession is not helpful

You checking stock market prices every 20 minutes will not make your shares go up.

I know that sounds silly to mention, but it is one of the most common mistakes investors make.

If you’re checking the value of your portfolio more frequently than once a month, you’re doing it wrong. Once a year would be fine.

Remember, once you’ve bought your shares, the price of your shares, or value of your portfolio, is simply telling you how much cash you would receive if you decided to sell at that moment. Unless you plan to sell, it’s just trivia – interesting but irrelevant.


Sharemarket investing provides an unparalleled opportunity for you to build wealth and gaining choice in life – embrace it with both hands.


In my book Financial Autonomy – the money book that gives you choice, we explore the 3 pathways to creating financial security and freedom – Investing in Stocks, Investing in Property, and Becoming Self-Employed. Download the first chapter free here to learn more


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