How to deal with volatile stockmarkets

My friend, who is the chief investment officer of a large insurance company, describes the stock market as volatile during the recent few weeks.

This means that the price will go up one day and down on another day. The movements can be quite large.

What can a small investor do, in a volatile stock market?

My suggestion: take a long term perspective. Decide on what is the right level for the stock market. This gives you a clue on whether the prices are too high, or too low.

As a long term investor, you should buy when the prices are too low (compared to its underlying value) and sell when the prices are too high.

What is the underlying value? Take a look at the price earning ratio (ie the current price divided by the earnings per share. If the profit is expected to grow strongly over the next few years, a PE ratio of 15 to 25 can be justified. If the prospects are moderate, the PE ratio should be between 12 to 18.

Many stocks may have exceeded the upper limit. The prices are too high. It is time to sell them.