September 29, 2011
Surviving the Market Volatility
Volatility survival is foremost in our minds after a couple of really bad days for the world’s key stock markets last week and again yesterday – the see-saw action continues to plague us, the investor/trader. After a barrage of bad news — a disappointing move by the U.S. Federal Reserve and — the reaction of the stock market – our first reaction is to dump the stock market, stuff the cash under our beds and sit tight!
As an investor, that would be the biggest mistake you could make!
I anticipate the whip-saw volatility to continue, considering the market movements encountered in the past couple of weeks – and believe that U.S. stocks are in for a particularly tough stretch in the near term, therefore a volatility survival plan is essential. However, you, as an investor should stay invested if you can, stick with a solid game plan, look for opportunities as they develop and volatility survival strategies in place.
In fact, there are several “strategies” for volatility survival that investors can bear-in-mind, that will let them navigate this near-term volatility, survive even a deeper market downturn, and remain in the hunt for immediate profit-making opportunities, wealth-building advancement and long-term investment benefits.
“The key to volatility survival is remaining flexible and focused.”
Maybe you can relate to one of the following quotes to help your thought of direction:
“It seems that we forgot to tell our little boys that the strongest trees -- those that tend to live the longest -- bend with the wind.”
-by Doris Helge, Ph.D
"Notice that the stiffest tree is most easily cracked, while the bamboo or willow survives by bending with the wind."
- by Bruce Lee
“Bamboo finds its strength in knowing how to give and bend without breaking when even the strongest winds blow.”
Future Thoughts to Volatility Survival
As discussed in the article “Concerns Surrounding the VIX Volatility Index”, on September 27, 2011, there will be a continued barrage of volatility in the stock market!
Look at the recent market activity, with U.S. stocks starting to slide, again, in earnest [last] Wednesday afternoon, after U.S. Federal Reserve policymakers announced an “Operation Twist” economic-stimulus strategy. The strategy wasn’t well-received by investors, and the central bank may have exacerbated investor angst on a worldwide scale by stating that it was worried about global growth.
On Wednesday and Thursday the Dow Jones Industrial Average lost 675 points, to 10,733.83, a 5.91% drop. The Standard & Poor’s 500 Index fell 72.43 points, to 1,129.56, a 6.03% drop.
Last week’s market slide was just the latest episode in an erratic market that has seen the Dow zig-zag to a 16.21% loss from its peak of 12,810.54 on April 29. The sell-off spilled over into markets in Asia and Europe.
Now is the time to come to grips with the thought that the markets MAY try to re-test their lows of March 2009 and volatility survival is again necessary. I say may, because there are still signs that this could be the bottoming out phase and we may be looking at brighter horizons!
The March 2009 nightmare was a stock-market bottom of 6,547.05 for the Dow and 676.53 for the S&P 500. That put the Dow 7,617 points below its all-time high of 14,164 reached in October 2007 – a 53.78% drop. And the S&P’s 56.8% decline knocked the index down 889 points from 1,565.15.
What are Some Safe Strategies for Volatility Survival?
The worries about a massive decline in the markets could make sitting on the benches a survival method. However, instead of cashing out though this crisis, investors should follow these following guidelines for volatility survival, while keeping an eye on their long-term investment goals.
Quote: When written in Chinese the word "crisis" is composed of two characters - one represents danger and the other represents opportunity.
~John F. Kennedy, address, 12 April 1959
1. Stay in the Game:
With such a dour near-term prognosis, it might be tempting to bail out of stocks indiscriminately. Do so at your own risk. Between 1928 and 2010, if an investor missed just the best 1% of the market days, the annualized return plunged from a positive 4.86% to a negative 7.08% – a differential of 12.94 percentage points.
“Staying in the game if at all possible always has been, and always will be, the pathway to profits.”
2. Take What the Market Gives You:
Bull markets aren’t the only places you can make profits. The key is being nimble enough to recognize that the tide has changed. Last week, for instance, before gold began its plunge, if you had used “put” options to set up a trade that would profit on gold’s expected near-term continued drop then you would have done well. This type of trade is quite common at S.O.M.E. (Stock Options Made Easy).
3. Consider Alternatives for Volatility Survival:
An example of other profit opportunities right now involves commodities – most notably gold and oil – which are worth buying on pullbacks (like we’re getting now). These alternative assets will help preserve the value of your portfolio as the markets rollover or stagnate. Both should accelerate dramatically when the world economy recovers, particularly as the U.S. dollar and euro realign against the yuan in the years ahead. China and India, for instance, have both dramatically increased their resources purchases in recent years.
4. Think Globally:
The conventional wisdom used to be that you’d put 5% of your portfolio into “foreign” stocks. It’s a new ballgame now, and some advisors say the right number is actually 30% to 40%. One way to achieve this objective is to put new money to work in so-called “glocal” stocks (globally recognized brands with localized focus), with fortress-like balance sheets, diversified revenue and experienced management. One recent study found that foreign sales accounted for 46% of overall revenue for S&P 500 companies that report sales from foreign operations – up from 30% just a decade ago. And some think that number is understated.
5. Sell Strategically:
Capture profits and protect your capital using trailing stops that are gradually ratcheted up over time. This will help you raise cash (which can be used to buy into the rebound when it eventually happens) without the emotional turmoil that causes most investors to make rash decisions that doom them to years of subpar profits.
6. Hedge Your Bets:
Use specialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
Hedging with options is a strategy that can be used like insurance for your longer term investments in shares. Just like you would buy insurance for your home to limit potential losses that may come from a flood or fire, you can use options to limit the possible loss your investments may suffer from a market downturn.
7. Deal in Dividends:
Dividend-paying stocks pack a punch – there is no denying this!. A Tweedy Browne Fund Inc. study of the cash payouts concluded with this stunning statement: “Over the past 100-plus years, an investment in a market-oriented portfolio that included, most importantly, reinvested dividends, would have produced 85 times (our emphasis) the wealth generated by the same portfolio relying solely on capital gains.”
Also, check out BDC’s (Business Development Companies) for dividends…..further information about this dividend opportunity can be read by clicking here.
8. Keep Your Keyboard Ready:
Bear markets create bargains – often lots of bargains. Keep a shopping list of the companies you hope to buy, and then step-in to the fray. If market conditions remain uncertain, change your tactics. For example, consider averaging into your position over days, weeks, or even months, to make sure you don’t overpay. That can help you take advantage of lower prices while also keeping you in the game. Think of it as a form of offensive defense.
Do not forget that options trading is a great method for volatility survival in a bear market, producing excellent profits if executed with deliberation and in a calculative manner!
Always have a plan, such as in any great business, a plan is essential for success, therefore your investment into the market to be profitable is also your business—“Plan Ahead”-- and stick to it where possible.
--“Discipline never goes out of style.”
If not already done, it is advisable to now put in place a carefully thought out, pre-planned investment program that helps you eliminate the kinds of knee- jerk reactions that are going to eliminate most investors for the third time in a decade – once on the way down, once because they buy in at the wrong time or with too much money, and once because they get left on the sidelines (again) when things eventually sort themselves out.””Success is simple. Do what's right, the right way, at the right time.”
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