Defensive Investing Is One Way to Manage Volatility: Charles Schwab

February 14, 2018 — 1:15 PM EST

Volatility is here and will likely stay in the stock market, requiring some investors to make changes to their approach to investing given the ease of the prior two years.

One way to do that, according to Charles Schwab, is to get defensive in investment choices. In a recent blog post, the San Francisco-based discount brokerage said that investors may want to look for defensive assets including cash, cash equivalents, Treasury securities and U.S. government bonds in times of volatility. The firm said that investing in those defensive classes can help stabilize a portfolio as stocks decline. Having investments in cash and short-term bonds is also smart for investors who need to access their money in the next few years because it will help them avoid selling investments in a down market. Read about whether you can make money in stocks.

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The Charles Schwab Corporation (SCHW) said investors who have to trade during times of increased volatility can also take defensive steps by considering the current market conditions when entering orders. The discount brokerage pointed to stop orders and stop-limit orders that will protect unrealized gains or limit potential losses as well as boost an investor's confidence as he or she trades when markets are acting with volatility.

It also behooves investors to take a long view when markets are swinging between wide gains and declines. After all, according to Schwab, even bear markets in which stocks fall by more than 20% have been short lived in the past. According to the brokerage firm, the average bear market going back to 1966 lasted slightly longer than 505 days. The longest bear market was 915 days and was then followed by a bull run of close to five years. "Timing the market's ups and downs is nearly impossible, but all investors would do well to ignore the noise and stay focused on their plans," Schwab wrote in the blog post.

Other tried and tested strategies to weather volatility include rebalancing to ensure that investments are still in line with the risk tolerance and time horizon of the portfolio, resisting the urge to sell solely on the movement of the markets since it can make temporary losses permanent, and staying diversified. "Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn't mean you should hold on blindly, but we suggest taking into account an investment's future prospects and the role it plays in your portfolio, rather than being guided by noise and fear," Schwab wrote.