When stock markets are erratic, you might think more about how to better manage risks and have a plan in place to help manage your portfolio during periods of increased volatility. At this time, you may also consider implementing an asset allocation strategy. Here are some things to consider when doing so.

1. Evaluate your risk tolerance and investment goals

Your sense of insecurity may derive from a lack of investment goals.

Consider asking yourself the following questions:

Are you comfortable with the risks you currently take? Is your portfolio able to withstand the market's ups and downs?

2. Take a second look at the types of investments you've picked

How do the assets in your portfolio correlate with each other? Do you need to add more assets to your portfolio to make it more risk- and volatility-resistant?

Funds are various, which include money market funds and bond funds with low-to-medium risks, dividend-paying funds, low-volatility funds, balanced funds and multi-asset allocation funds, and funds with a small max drawdown, etc.

You can click the discover tab>funds>fund ranking>filter on moomoo to find the funds you want, and your choice depends on your investment goals and risk tolerance.

3. Determine your asset composition

After selecting your investments, you can take a look at the mix of different asset classes to see if the portfolio is in line with your expectations and risk tolerance.

The equity-bond balanced strategy is useful when determining your asset mix. Here’s a hypothetical example: Lily, a younger investor, usually opts for growth asset allocation, with 70% equities and 30% bonds. In a volatile market where bonds tend to have higher returns, she can raise the bonds' proportion, say 60% equities + 40% bonds allocation.

Also, the Merril Lynch clock can help you better allocate your assets. Fluctuations might happen when the economy moves from one stage to another. You may consider increasing the proportion of assets that tend to perform better in the next economic stage.

Recovery period: The economy grows with low inflation. Potential asset return: Stocks>Bonds>Commodities>Cash;

Overheating period: The economy is on the rise with high inflation. Potential asset return: Commodities>Stocks>Cash/Bonds;

Stagflation period: The economy goes downward with rising inflation. Potential asset return: Cash>Commodities/Bonds>Stocks;

Recession: The economy goes down with falling inflation. Potential asset return: Bonds>Cash>Stocks>Commodities.

Note:

This strategy overemphasizes asset rotation without considering valuation and long-term trends. Additionally, it is challenging to implement this strategy because investors can make mistakes in forecasting different stages of an economic cycle. Market performance can deviate from the Merrill Lynch clock, and can be more elusive. Your trading decisions should be based on market circumstances and your investment plan.

4. Regularly review and rebalance your portfolio

Changes occur constantly in a volatile market. It is necessary for a prudent trader to regularly review and rebalance his or her portfolio.

Additionally, regular savings plans and a long-term investment horizon may also work in the erratic market.

Regular savings plans may have the ability to lower overall cost basis, help you form a good investing habit, and potentially improve your portfolio performance.

A volatile market can be intimidating to investors. Taking a long-term investment horizon may help you prevent making irrational decisions based on emotions.

Last, pay attention that asset allocation and diversification do not ensure a profit or guarantee against a loss. Investing involves risk and you may lose money regardless of the strategy selected.