Five Investment Strategies Used in Uncertain Times

In recent weeks, conflict in the Middle East has created uncertainty in markets already stressed over artificial intelligence (AI), tariff threats and job concerns, leaving many investors feeling anxious. During times of uncertainty, investors may use different strategies to hedge against risk.

Here are a few of those strategies.

Diversification
Geopolitical shocks can be idiosyncratic or localized, meaning they tend to impact specific regions, sectors or commodities, but they can also spread across countries and industries. If you’re concentrated in a specific area, you could see your portfolio take a larger hit than if you were invested across a broader array of geographies and industries. Owning different asset classes, like stocks and bonds, can also potentially act as a hedge against volatility that spreads.

What to own will depend on an investor’s financial goals, but a diversified portfolio could include a mix of government bonds, domestic stocks, international equities and real estate. Within the equity bucket, that could also mean holding technology, energy, financial and utilities stocks, or any of the Canadian stock market's other 11 sectors.

“Safe-haven assets”
In times of uncertainty, some investors seek to buy assets that have often retained their value or increased in value during market turbulence. These are known as ‘safe-haven assets’. For example, investors might look to gold and other precious metals during periods of economic or political turmoil because the metals tend to rise¹ during uncertain times.

When there’s an energy-related shock, similar to what we’ve seen in the early days of the recent Middle East conflict, energy stocks might rise because their fortunes are tied to rising prices of oil and gas. In the 1970s, for example, the oil sector strongly outperformed the broad equity market during three oil-supply shocks.²

Keep in mind, though, that safe-haven assets such as these are often volatile and don’t always perform as they have in the past. While a commodity such as gold can have a place in a portfolio, it’s important to remain diversified so that if an issue ends and gold declines, other assets in your portfolio will, hopefully, rise.

Limit orders
During times of market volatility, you might also want to consider placing a limit order to control the price at which a trade executes. A limit order ensures that a trade only goes through at a specified price or better, meaning it could potentially be a useful tool during periods of geopolitical tension or sudden market swings.

If you place a limit order to buy, the trade will only execute if the share price is at or below the limit price you set. For example, let’s say a stock last traded at $50 but you only want to buy it if the price falls to $40. You could place a limit order at $40. If the stock never reaches that price before the order expires, the trade won’t occur.

If you place a limit order to sell, the trade will only execute if the share price is at or higher than the price you set. For example, if you buy shares of a stock for $50 and want to sell when the price reaches $60, you could set your limit price at $60 and choose your “good through” date. The trade will only occur if the stock price rises to $60 or more by that date and there are enough buyers.

Puts
For more experienced investors, buying put options is an approach used during times of uncertainty, especially for those who want to hedge against losses while still having exposure to equities. Because puts can increase in value when the price of an underlying asset falls, they could help minimize losses in a portfolio during market declines in two primary ways. The investor can either offset the position losses with the premiums gained on the put, or exercise the put which sells the stock at the strike price, and limits the downside market risk should the stock fall further.

This establishes a ‘floor’ price, limiting the downside risk by effectively locking in a price regardless of how low the stock may fall. If the stock keeps rising, the investor benefits from the upside gains. This, however, would be offset by the cost of premium paid to purchase the put.

Since options trading can be complex, investors should understand the nuances and the risks before taking part. Learn more about options.

Consider other sectors
Volatility isn’t necessarily something to avoid – it can also present new areas to consider, as some sectors can benefit from the different factors affecting the markets. For instance, defence stocks can do well during geopolitical uncertainty as countries may ramp up defence spending.

While no approach can guarantee against losses, a well-diversified portfolio could potentially reduce risk and deliver long-term results. As with any investments, consider tactics that align with your goals, risk tolerance and time horizon.