Investing in Volatile Markets
Over the past couple of months, the U.S. stock market experienced increased volatility; on September 18th, the S&P 500 closed at 2011.36 and on October 15th, it fell to 1862.49, followed by a swift rebound to a new all time high of 2031.21 on November 6th. At Ideal Asset Management, we believe it is in tumultuous markets such as these that it is crucial to make rational, objective decisions. These are some of the tenets I use to invest in volatile markets:
• Increased volatility is not a sign of weakness; rather a reflection of incessant speculation by hedge funds and day traders.
• Use volatility to your advantage. If you liked a stock at $60, and it falls to $56 in a week based on no company-specific bad news, one should be confident in the fact that the shares have even more upside once the market recovers. Let others in the marketplace tremble while you take the long view and happily hold onto your valuable shares.
• Only invest in companies that are dominant in their industry and whose values are significantly undervalued based on a two-year investment horizon.
• Try to invest in companies that use shifting industry trends to their advantage. For example, a brick and mortar retailer that is investing in technology and omni-channel capabilities.
• For mature companies, a large stock buyback program should usually be seen as a positive indicator, as long as the company is still investing in its future growth.
• Do not dismiss an investment idea because the “smart money” claims that it is overvalued. Always do your own research—often times once you analyze a company in depth you realize that a so-called expensive stock is actually a bargain.
• Do not diversify for the sake of diversification. If you can’t find enough bargain stocks to invest in and you do not feel comfortable putting a large percentage of your portfolio in a few stocks, keep some cash on hand and wait for other bargain stocks to emerge.
• Do not be afraid to sell a stock if the prospects are not as great as when you first invested in it. You might find another investment opportunity that has a better risk/reward ratio. Often times, holding on to a losing stock not only hurts your returns, it hurts your psyche.
For investors in today’s marketplace, writing down a few rules to help guide you through bouts of market volatility will make it easier to take advantage of opportunities, and help you resist the urge to sell during market downturns. The next time the market suffers a sharp downturn, view it is an opportunity to capitalize rather than a reason to worry.
All ideas expressed in this article are the opinions of Ideal Asset Management LLC.
Before trading on any of the advice in this article, consult with your financial advisor to
make sure it suits your financial goals
All investments carry the risk of loss
Past performance is not indicative of future results