Profiting From a Volatile Market

Written by: David Wilkening

Highly popular writer Charles Dickens knew what he wrote about. He was right so often it’s almost like he was around in today’s world. The highly popular 19th century novelist was talking about life in general during the French Revolution when he said it was the “best of times, and the worst of times.”  But he could have been referring to stock market investment in a volatile market.

What seemed like worst times were at times the best. And vice versa.

History tells us the best five-year return in the US stock market began in May 1932. We all know when that was: the height of the Great Depression. The next best five-year period was in the summer of 1982, which as you may recall was a recessionary time with double-digit levels of unemployment and interest rates.

This may lead you to conclude the investment market is volatile, to say the least.

But in that volatility there is also investment potential. It’s like a math formula: Volatility=investment. So what are we talking about here?

Or how do you ride out the volatility of the market during best and worst times?

Experts and real professionals have their own techniques, of course, and you probably don’t want to emulate them. But what about you amateur investors out there?

Here are a half dozen rules:

—First have a strategy. Have goals, a time for meeting them, and evaluate your own tolerance for risky areas. Are you a) conservative or b) a risk-taker? Decide or better yet, reach a compromise for both.

—One of the best things to protect your portfolio is to diversify. Not all eggs in one basket is a hedge against investment volatility.

—Invest some of your money in non-cyclical businesses. What percentage you choose is up to you based on risk willingness (see above). The most conservative companies are generally consumer goods-driven. Think Wal-Mart as just one example of many.

—The professionals like to move in and out of the market. But not you, please. Timing that is impossible. Remember that you will have to ride out the best and worst of times. Keep an even keel.

—Keep investing regularly. Don’t do it in fits and starts. With a volatile market, you will eventually benefit because the bad times turn into good ones eventually if you have patience.

—Instead of hands on, try hands-off. Consider a managed account or an all-in-one fund or  a target data fund for longer term goals such as retirement. These single funds tend to appreciate in the long run but it also helps in the long run that you’re dealing with professionals.

There are any number of other maxims that could be mentioned. You should find your own. But a key to doing that and coping with today’s volatile market is to always keep that reality in mind: Think volatile=market. But you don’t have to avoid it. Accept it, but more importantly, find your own ways to live (and cope) with it.



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Profiting From a Volatile Market

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