In volatile markets it is easy to want to over-adjust your long term portfolio, or to panic and sell everything all together. While this may be the first thing you want to do it's not always the most effective or most beneficial thing that you can do. Today we present a few options for methodically adjusting your portfolio in a volatile market. The first thing that many of us consider is to reduce our portfolios by selling some or all of our positions in hopes of avoiding a downturn or giving back hard earned profits. This can be done in many ways. The first thing you can do is an across the board adjustment of some kind. Many portfolio managers will reduce all positions by 25% (or some percentages). This means that they will either manually sell 25% of each position or use some auto feature built into the software that does this for them. In up markets and in down markets its always a good idea to know where you will reduce positions. This can be for a profit, trailing profit, or to eliminate drastic drawdowns.

Maybe you have some really strong positions that seem to be immune to market volatility. Another choice you may make is to only cut, or reduce the underperformers in your portfolio. These names can be identified in a few different ways. Let's say you notice that the market has a nice week but one of your stocks, which is normally correlated to the market isn't moving at all. You may identify this as weakness and choose this stock to reduce or eliminate from your portfolio. What if the market is headed lower? Well you may also notice that there are positions that seem to outpace the market's decline. For instance maybe the stock market is down 6% but a few of your stocks are losing more than the markets. Those would also be candidates for reduction or elimination.

The last thing you may do is to hedge your portfolio rather than reduce or eliminate positions. With the advent of inverse ETF's and volatility products one can do this with the click of a button. Purchasing shares of an inverse market ETF is one way to reduce directional risk in a long term portfolio. There are a few ETF's that focus in on volatility and leverage. ETF's such as VXX and TVIX are names that have gained traction lately due to the ability to hedge. These are not necessarily suitable for all investors though, and one should carefully educate themselves on the complexities of these vehicles.