Making Money in Today’s Volatile Market

Let’s face it, investing can be hard.

It’s easy to make money in a bull market when everything is going up; everything works, and you are feeling good. But in a down market, or when we are experiencing a period of prolonged volatility, making the right investment choices can feel overwhelming.

I will preface this short piece by saying that your long-term action plan of continuously funding your 401k or IRA should not change. Regardless of market conditions, I continue to systematically put money into my retirement account, in both good markets and bad. See our article on Investing Your Roth IRA in Vanguard Index Funds.

But what about investing beyond your retirement contributions? What’s the strategy here?

What actions can you take right now to stay focused amidst a sea of volatility?

The past few months have been challenging. As a long-term investor, I do not try and predict the daily or weekly market fluctuations. I am far less concerned about the short run economy. And to be frank, no one knows if stocks are done selling off. I’d venture to say they haven’t, but that’s a contradictory statement and one that I won’t bother laying claim to.

I will, however, say this, that those individuals who are willing to do the research and identify new opportunities can position themselves for success. The more the markets retreat, the more I begin to see attractive investments, at new entry points, with future potential. There are many quality stocks that are trading well off their 52-week highs.

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Make sure the money you need isn’t tied up in the market.

Put your cash to work.

Reassess your risk tolerance.

  1. Make sure the money that you need over the next three years is not tied up in the market.
    This money needs to be in a safe, liquid investment. That means cash or something equivalent. I am talking about money that may earmarked for a house, your child’s wedding, retirement living expenses, etc.

  2. Put your cash to work. I am referring to money that you don’t need to pay your bills, fund Suzie’s first year of college, or help junior with that down payment on his first set of wheels. This is money that you can afford to lose. It is second nature to second guess your investment decisions, especially in today’s market. I want you to look at market declines as opportunities. There are solid businesses that are trading at a discount right now. History has continuously showed us that you want to get cash earmarked for investing in the market sooner rather than later. Regardless of what happens in the next few weeks or months, you want to identify quality stocks and begin building or adding to existing positions. Again, I am talking about stocks that we intend to hold for 5 or more years.

    Remember that no one can predict the bottom. Or let me rephrase that. No one can predict the bottom more than once. LOL.

    We are in correction territory for the Nasdaq and the S&P 500 is moving in that general direction. This doesn’t mean it won’t get worse. You can’t time bottoms.

  3. Take this time to reassess your risk tolerance and rebalance your portfolio. Make sure that you are well diversified across a range of asset classes. Diversification can help to mitigate risk and volatility in your portfolio. As you already know from reading TIW, different assets carry different degrees of risk. While some will stay in a bubble, others may go down or rise in value as the market landscape changes. You need to keep track of the growth of your portfolio and the fluctuation of each allocation. Ideally, your portfolio should have assets that mature at different intervals.

    A buy-and-hold strategy is our recommended path for long-term investment. We believe in passive investing, which will allow for risks to play out and various asset classes to mature over time. However, this does not mean investors should be completely passive. There are times when an investor must cut his or her losses and exit the stock. This is where a stop-loss strategy comes into play. Over the years I have personally set most of my stop-loss marks to 15%. However, you may wish to have a tighter stop-loss inside 10%. My investing mentor religiously kept his limit at 7% to 8%. William O’Neil, the founder of Investor’s Business Daily, said it best, “You don’t want to take a loss, so you wait and you hope, until your loss gets so large it costs you dearly. This is by far the number one mistake most investors make.”

Additionally, you need to anticipate risk by creating a fund for financial uncertainties. This is your rainy-day fund. More to come on this in a future article. There is also the need for medical and life insurance. See our article on Life Insurance as an Investment.

In conclusion, do not monitor your investment portfolio every second of every day. It is understandable that you wish to monitor how your investments are performing. However, obsessing over performance and the daily fluctuations of stock prices can lead an investor to unnecessary anxiety. If your portfolio is aligned with your long-term plan, this volatility won’t have an impact.

Stay positive. Stay focused. We feel the same frustration that you do.

Market corrections allow each of us to emerge a bit wiser provided your follow the steps outlined above. We look forward to investing alongside you today and tomorrow.

Best, Michael and The Investor Weekly Team

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