Volatile markets are great for the day traders. They offer great opportunities to make money, but as a trader you have to be watching the market movements on a minute by minute basis. Not everyone has the time or the risk tolerance to invest this way. Sometimes it’s better to play things safe during highly uncertain times.
Truth or Fiction
Markets move based on news, true or not. When the news isn’t true or isn’t decisive the markets tend to move more because of the uncertainty. Uncertainty leads to speculation, speculation leads to higher volatility which leads to an aggressive intake of pepto-bismol, tums or any number of vices to calm your nerves.
We have recently seen the market uncertainty due to political unrest in the middle east, and the natural disaster and nuclear uncertainty in Japan. The news headlines start to control the markets reactions to how things are viewed. With the overabundance of news sources available today, when information stops flowing out of the these event areas, some news providers turn toward less credible or irrelevant sources for headlines. This trends toward relying on rumors and fear mongering and only adds to the speculation and market volatility.
Market volatility will subside when there is some finality to these events. It doesn’t matter to the markets if the final information is good or bad, as long as it offers a “the end” finish.
How to Play It
During highly volatile markets, with your investments you have two options: sell to preserve profits or prevent further losses, or ride it out. It’s just that simple, almost.
It’s always a good idea to take some profits when the market starts to swing. If you’re up 10%, 15%, 25% or more on an investment it’s a good idea to lock in the profits. With more cash on hand you’ll be able to take advantage of lower priced investments when the markets calm down.
Keep an eye open to events that have a direct impact on your investments. If it’s a negative impact event, it’s probably best to get out now, before it gets worse. A negative impact event is similar to the nuclear reactor uncertainty in Japan. Any stocks having to do with the production or supply of any nuclear related equipment or material took big losses and should probably be avoided.
However if the event has a positive impact, be ready to see short term higher prices and take advantage of those higher swings. A positive impact event, would be similar to the political unrest in the middle east, causing higher oil prices. Any investments in oil companies saw big short term gains, the opportunity to take profits near those highs and buy back into those companies as oil prices started to fall again.
If you’re already invested in high quality income generating investments you may be comfortable with riding out the storm. High quality bonds and dividend paying stocks tend to be safe havens for money during these events and provide for much lower price swings in general.
Higher volatility tends to offer up good buying opportunities for stocks that are dragged down in price even though they are not directly impacted by the events taking place. Keep a shopping list of these opportunities and buy back in as the market volatility subsides.
If your not already playing defense, high volatility should be a reason to start thinking about it. Playing defense is a subject I’ve covered before and can’t be covered often enough. Protecting your portfolio is the best way to prevent major losses in any type of market.