IF nothing else, the market volatility over the past few weeks has demonstrated how interrelated global economies are and how quickly investor sentiment and the direction of the markets can change. Earlier this year, improved earnings from US companies fuelled investor confidence in the global economic recovery and likewise their appetite for risk grew. However, recent uncertainty and renewed anxiety over Europe’s debt crisis have caused a complete turnaround.

After hitting three-year highs in April, the benchmark Dow Jones Industrial Average (DJIA), Standard & Poor’s 500 Index and the Nasdaq Index have all declined, by 1.6 per cent, 1.8 per cent and 1.5 per cent respectively since May. As expected, commodity prices have been more volatile with silver declining by 26 per cent and gold retreating after topping US$1,500 per troy ounce, its all-time high. Similarly, oil prices, which reached new heights in the wake of unrest in the Middle East, have been edging lower, pressured by a stronger dollar and concerns about global growth prospects after a slew of disappointing economic data.

Therefore, it is not surprising that this recent correction has been keeping investors from diving into the markets, with only 35 per cent of the public currently invested, compared to the usual 55 per cent according to Clark Capital Management. As investors flock to safety shedding riskier assets such as the euro, which continues to be weighed by Greece and other debt-burdened nations, demand for the US dollar and treasuries has resurged.

Still, as uncertainty lingers, only time will reveal the resilience of economies and companies and consequently the sustainability of the global economic recovery. In the meantime, one cannot stress enough the importance of active portfolio management as anticipated news and unexpected events constantly shift markets. While we cannot ignore the interrelatedness of global economies, we should also be aware that different occurrences move different markets at different times. As such, the old cliche, “Don’t put all your eggs in one basket” is particularly applicable to the realm of investing and hence taking the initiative to diversify is of utmost importance.

Spread your money among several investments in various asset classes, industries and regions to help mitigate the risk in your portfolio. When this strategy is applied properly, portfolio volatility or fluctuations in the value of a portfolio should be reduced, resulting in a more consistent performance under a wide range of economic conditions. There are a myriad of options that one can consider when diversifying and while many may see this as a great opportunity, to others it may be viewed as a deterrent. However, one of the simplest ways for investors to gain exposure to various investments is through mutual funds, vehicles created exactly for this purpose. For example, Canada-based CI Investments, which is a leader in Mutual Fund innovation, offers a wide range of funds, denominated in both US and Canadian dollars. CI invests in a wide variety of securities and asset classes, providing investors with a relatively inexpensive way to reap the benefits of a diversified portfolio.

Furthermore, as prices fluctuate, rather than panic investors should implement dollar-cost averaging –investing fixed amounts at regular intervals, with the aim of reducing the average cost and lessening the risk of investing a large amount in a single investment at the wrong time. To put this in to perspective, Investor A purchased 1,000 Apple Inc (NASDAQ: AAPL) shares in blocks of 100 shares every two weeks from January through May 2011, paying an average US$344.92 per share (excluding fees and commission). In comparison, Investor B did not employ dollar-cost averaging and purchased the same amount of shares in a single transaction when it hit a record high of US$364.90 per share in February 2011, paying US$19.98 per share more than Investor A.

Evidently, these and other strategies can provide benefits but they require effective planning and the first step is the evaluation of investment needs and objectives. Such goals may include capital preservation, current income, or capital appreciation. This will enable investors to find the appropriate balance between desired return the risk one is willing to assume. Determining one’s investment horizon is also key to identifying risk tolerance and portfolio allocation. Bear in mind that the longer the time horizon, the more volatility a portfolio will experience.

In life, almost every attempt at success involves some amount of risk and investing is no different. But, by devoting time to examine your goals, conducting research, and employing sound investment strategies, you can potentially lower your exposure to risk while reaping higher returns in a constantly evolving global economy.

Deon McLennon is an Equity Trader at Stocks & Securities Ltd. You may contact him at dmclennon@sslinvest.com.