Six actually useful things to do when markets are jumpy

• When markets become volatile, it can be tempting to hit the exits. But the savvier thing to do is make a plan that suits the changed market environment.

• Start off by rebalancing your portfolio and re-evaluating your asset class weightings, and then consider protecting your portfolio against more losses using fit-for-purpose options.

• Take a moment to revisit the investment theses of your individual stock holdings, decide when and how to buy the dip, and, finally, make sure you learn from what you did right and what you did wrong.

About a week ago, stock markets around the world went on a wild roller coaster ride, in some cases seeing their worst sell-off in decades, before recovering slightly. And all that turbulence has no doubt left you feeling wary.But, look, as tempting as it may seem to sell all your investments when things get rocky, with the hope of buying them back later at a lower price, you’d be wiser to hold your nerve. It’s virtually impossible to time the market perfectly when you sell, let alone again when you buy back in. So a better move, then, is just to roll with the punches.Of course, that doesn’t always come easy: it’s hard to be chill when your money’s on the line. So, if you’re itching for something to do in those rough-going moments, here are a few constructive things to keep you busy.

1. Rebalance your portfolio

At some point, you likely spent some time thinking about your target allocations for various asset classes – deciding what percentage of your money goes to stocks, bonds, and other things. And, after this recent bout of market volatility, you may find that your breakdown has been knocked out of kilter. So the first thing you should consider is rebalancing your portfolio to bring it back to the way you intended.Rebalancing, after all, will force you to take profits on asset classes that have performed especially well and to invest that cash into asset classes that haven’t (and are consequently cheaper). This makes sure you buy low and sell high, which is what every investor wants to do.

2. Re-evaluate your asset allocation

Since you’ll be rebalancing things anyway, take a minute to re-evaluate your asset class targets to make sure they’re still where you want them – especially in light of the current market environment. Right now, most of the world’s central banks are shifting their attention away from inflation, which has fallen closer to their targets, and taking a harder look at slowing economic growth. That’s pushing many of them to begin lowering interest rates. Certain assets fare better than others in that environment, and so this might warrant a change to your portfolio’s target asset allocation.Government bonds, for example, tend to do well in times like these. So shifting some of your allocation from shares to bonds might not be a bad move, especially if you’re investing in the US, where the stock market is looking expensive and a bit frothy. In contrast, the yield on 2-year Treasuries is currently around 4% – a huge step up from the sub-1% levels seen during most of 2021 and 2022. It’s not every day that you can lock down a 4% annual return for two years. You could also consider long-term bonds, like 10-year Treasuries. These also are yielding around 4%, but could offer the potential for more capital appreciation since they’re more sensitive to falling interest rates (remember: bond prices rise when rates fall, with longer-term bonds increasing more).In addition to income, bonds offer a few other key benefits. First, diversification: bonds’ correlation to other asset classes such as stocks and commodities tends to be low. So by having them in your investment mix, you can shrewdly spread your bets, reducing your portfolio’s total volatility and improving its risk-adjusted returns. Second, a potential hedge: government bonds display safe-haven properties and can help protect you against economic slowdowns, rising stock market volatility, and falling stock prices. That’s why bonds performed so well during the August 5th sell-off.Another asset class to consider is gold. The precious metal tends to do well when interest rates are falling because the “opportunity cost” of owning it decreases (gold, after all, doesn’t generate income). What’s more, gold’s perceived safe-haven status tends to keep it in high demand when there’s economic or geopolitical volatility. And right now, we’ve got plenty of both, with renewed recession fears, US election uncertainties, elevated China-Taiwan tensions, and ongoing conflicts in the Middle East and Ukraine.

3. Inspect your stock holdings

If you own a bunch of different stocks, it’s worth properly revisiting your investment thesis for each one. It doesn’t matter whether the stock is down or up – the key question to ask yourself is this: if I didn’t already own this stock, would I buy it?If the answer is yes, resist the urge to panic-sell. Instead, consider investing a little bit more if the stock drops below your predetermined price level. Ideally, these are shares of high-quality, profitable companies with reasonable valuations that are being indiscriminately dumped by investors because of market volatility. If, on the other hand, the answer to that question is no, consider selling your position – even if that means realizing a loss. Remember, during big sell-offs, the market is particularly unforgiving of speculative, expensive-looking stocks that have previously surged, since a lot of investors will rush to hit the exits at once.Related to all this, ask yourself whether your stock holdings are overly concentrated in a single sector, like tech. Excitement over AI has pushed folk to crowd into tech stocks, sending their prices through the roof. Lately, however, there’s this nagging worry that the big firms’ heavy spending on AI isn’t translating enough into actual sales.If you share those concerns, you could consider investing in utility stocks. These companies are already benefiting from rising electricity demand from AI-related data centers. Plus, their shares offer a cheaper way for investors to gain exposure to the AI boom compared to more expensive tech names. And, as an added bonus, utility stocks tend to do well when interest rates come down. That’s because they pay out a lot of their profit in dividends, leading many investors to compare them to income-paying bonds.

4. Protect your portfolio against more losses

Sometimes the best thing to do during volatile markets is nothing. Take a breath, turn off the news, and stop checking your account balances. That’s especially true if you have a sensible portfolio diversified across different asset classes, and if your individual stock holdings all have sound investment theses. But if last week’s sell-off turns out to be just the beginning of a bigger market drop, it might be wise to buy some insurance for your portfolio.You can do this without having to touch any of your existing holdings by purchasing out-of-the-money “put” options on stock market ETFs. The benefit of using options is that their value increases with volatility, so they can protect you against both falling stock prices and rising market turmoil. Just be aware that if markets quiet down or rebound, you’ll lose the entire option premium – and that’s simply the cost you have to pay for downside protection.

5. Form a plan around buying the dip

Long-term investors understand that the market will eventually recover, and that it’s good to be positioned for the rebound. So if you have some spare cash that you were planning to invest anyway, you should view a stock market tumble as a buying opportunity. But don’t just blindly buy the dip every time the market falls – have a smart plan in mind.One popular strategy is known as dollar-cost averaging: buying a set amount at set intervals, regardless of the asset’s price. Let’s say you had $2,000 that you wanted to invest in an S&P 500 ETF. You could, for example, invest $400 into the ETF every week over the next five weeks. That strategy reduces the impact of volatility on the overall purchase and removes any element of trying to time the market (usually unsuccessfully).Another strategy is to split your investment as the stock market hits progressively lower levels. For example, the S&P 500 is currently hovering at around 5,200: you could split your $2,000 into five $400 portions and invest each one every time the S&P 500 drops by 200 points. So you’d invest the first $400 at 5,000, the second at 4,800, the third at 4,600, and so on.

6. Learn from what’s happened

The best investors in the world don’t get emotional or blame external circumstances for their losses. They own up to their errors and learn from them. It’s the best way to avoid repeating your mistakes and getting hit by similar big losses in the future. So if your portfolio took a disproportionately hefty hit over the past week or two, now’s your chance to ask yourself why that happened.Were you, for example, overly concentrated in tech stocks and other assets that basically move in line with tech stocks (like crypto)? If so, that’s a genuine mistake you’ve made, and the key lesson here is to better diversify your portfolio across different stock market sectors and asset classes that don’t all move in the same way in a given economic environment.Or, were you perhaps using too much leverage – i.e. investing using borrowed money, buying ETFs that promise two to three times the underlying assets’ returns, trading futures contracts, and so on? Remember, leverage is a double-edged sword: it amplifies gains but magnifies losses too. That kind of risk-taking is a genuine misstep when market volatility is spiking, and, in my humble opinion, most investors are better off avoiding leverage altogether.