Ways To Survive A Volatile Stock Market

by Silicon Valley Blogger on 2012-06-1225

The economy and the investment markets behave like roller coasters sometimes. So what do we do in the face of such changes? Whether you are an investor, entrepreneur or employee, you’ll benefit from being prepared when changes strike. Here are some things I do to prepare myself for economic uncertainty.

What do you do during uncertain times? When the stock market is tossing and tumbling, I become more vigilant and more excited. In particular, my household begins to strategize about what we should be doing to take advantage of the uncertainty in the various financial markets.


What’s confusing to us is that some of our sources — places where we get our information to make our own forecasts — are giving us seriously mixed signals. Some sources are telling us that everything is going to hell in a handbasket, while others are beginning to sing the tune of a buying opportunity somewhere in the horizon. On top of that, some investment bloggers are uncertain about their positions, thinking that any kind of dip may be a dead cat bounce.

The truth is, during volatile market periods, I would often opt to build a larger position in equities by buying more shares when they got cheaper. And in the past, it was comfortable to dollar cost average down because youth was on my side. I used to think: “If the market dies, so what! I’ll just make up the difference with my consulting income.” And that thought was my security blanket. And looking back, that strategy played out fairly well.

Wall Street Stock Market Crash

The only time we ever pulled the plug on the market was when we sold out about 65% of our equity holdings on January 2000. That was when our sources gave us heavy warning about the upcoming debacle expected to hit the dangerously peaking market. Back then, it was easy to see that the market was becoming insanely irrational. After all the animated arguments I’ve had with the leveraged traders at work who laughed at me for being relatively conservative, my gut feeling confirmed that it was time to lighten up.

Fast forward to today: this time around, we’re older, and on a more limited income (thanks to bigger family expenses). We’re reasonably invested but there’s a tug-o-war happening in us: our clocks are telling us to slow down a little, but our portfolio looks rather stodgy (and boring). So we’re evaluating possible moves.

Find Investment Opportunities In Any Market Environment

Can we capitalize on market volatility? I believe we can. Here are some moves you can make to survive a market that refuses to stay still.

#1 Think ahead and try to think positively.
Your financial situation won’t hurt so much if you begin focusing on your end goals. I console myself by thinking that when economic shifts happen, the stock market usually reacts to such changes in advance. So if we expect the next year to be rosier for the economy, then watch out for a stock market recovery several months earlier (e.g. some experts will say 6 months earlier or thereabouts).

#2 Understand what’s upsetting the market.
I’ve taken a renewed interest in understanding how the investment markets work; it’s been said that down periods are rife with prime opportunities. I try to look at what things we can leverage today so we can be better positioned when things start to get better.

So study the markets. A technical break in the stock market’s movements and a shift in market direction should prompt you to revisit overall economic indicators. If they’re still positive, you may assume that the impact of a one day (or few days’) sell off won’t be felt for long and the markets should eventually rebound. It’s when there’s a basic underlying change in the economy that a technical break like this can be the start of something more ominous and potentially damaging to the markets.

Time will tell how a one day slump will turn out. But it will be one of the following:
(1) A blip or non-event (market recovers quickly without a dent in it)
(2) The start of a correction or a drop of at least 10%, but not more than 20%
(3) The start of a correction that eventually presents a buying opportunity
(4) The start of a long term downward trend (bear market activity)

Depending on whom you ask, you may get different answers on what will happen next but the key is to sift through the news and analysis to determine how overall fundamentals are doing. By keeping abreast with such information, you can at least anticipate some general market movements and not get too shocked when equities make like a roller coaster.

#3 Wait for a buying opportunity if you intend to increase your equity position.
If you’re planning to get into equities, then wait for a buying opportunity when the market weakens and take advantage of a developing market correction.

#4 Hedge and get into new or underrepresented asset classes.
I want to consider new ways to invest. I’ve started to nibble on gold and have investigated currency plays. But we prefer to hedge our portfolio better by considering adding weight to areas that we have a bit more familiarity with and which may benefit from current market trends (such as real estate and international equities). I’m also keeping my eyes peeled for investment opportunities that pop up in our local area. I’ve also been checking out rental properties as well as the possibility of carving out a position in REITs. Another move would be to raise the allocation of our international equities as fund share prices in this area decline.

#5 Rebalance your existing portfolio.
On those occasions when the markets are in free fall, it hurts to see sinking numbers. This is why I check my investment portfolio on a regular basis to ensure that it doesn’t stray too far away from our original asset allocation model. I’ve been working to readjust our investments so that our cash position doesn’t overwhelm our shrinking stock allocation.

You can also do the simplest thing and just rebalance your portfolio after any recent market shifts. This would just entail staying with your intended allocations and making sure your investments are still conforming to their stipulated amounts.

#6 Sell and lighten your position.
You always have the option to go lighter on those investments that bear more risk. Sometimes, you can decide to make tactical moves based on where you think the national and world economies are headed. You may want to think about “selling” equities in favor of other investments (see #4). Or you can lower your risk by moving your most concentrated single stock investments into more diversified positions (such as index funds).

#7 Or sit tight and do nothing.
This is a prerogative that you have when the markets begin to unravel. You may want to stay put and stay the course. I prefer to review our positions first before seeing if it could benefit from some tweaking. If there are fundamental reasons to break out of the inertia that is “buy and hold”, then we need to reevaluate just how we can capitalize on the changes we are seeing in the financial and investing landscape.

In Conclusion

Depending on your goals, you may want to make some readjustments to your portfolio. But first, perform a portfolio review and see if you have enough funds to get into additional investments or whether you’ll need to focus on minimizing your risks. If we can channel our fears into more productive actions, we’d not only do our finances good, but we could also possibly help influence the direction in which our economy is headed.

Created April 9, 2007. Updated June 12, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 25 comments… read them below or add one }

limeade April 9, 2007 at 5:26 pm

I like what you have to say about the unstable market situations. All the options you present appear to be rational and well thought out. Whatever you choose to do, at least it won’t be a rash and emotional decision.

-limeade

damien April 9, 2007 at 6:03 pm

Sounds like you know how to cope. My boss said she lost $4k last weekend. In a way, I’m glad I have a simple teacher’s retirement investment and a conservative, boring TSA I put into every month. Then again, as they say . . . nothing ventured, nothing gained.

Sun April 9, 2007 at 7:22 pm

Make sure you to check whether it’s a good time to enter into REITs (however, it shouldn’t matter that much if you plan to hold the investment for a long time), but for international stocks, I think that there may be opportunities still ahead. If you haven’t started investing in international stocks (or mutual funds) yet, you may want to take a look at DODFX, a very solid fund from a very solid company.

Silicon Valley Blogger April 9, 2007 at 9:48 pm

Thanks for the nice words. :) I’m really eager to try to diversify further but still haven’t had the nerve to do it. I appreciate your info Sun, I will definitely look at your suggestions, particularly DODFX. I may wait a bit longer for making some of the moves as I try to get my ducks in a row a bit.

Gina April 9, 2007 at 10:25 pm

I like your ideas especially the first one on what we can do during this current market phase. It’s important to know when to take action. We can’t just do things which will make us unaware of the current situation. We should be prepared for those opportunities.

Moneymonk April 10, 2007 at 2:59 pm

Well said. I have dealt with stocks long enough to know. The long term is always better.

Golbguru April 10, 2007 at 3:32 pm

Yeah bailing out could even turn out to be more hurtful (unless the market spirals down even more). In fact, the best bet might be to invest a bit aggressively in this period… but to each his own! The market may eventually recover and rake in better yields for you. In the least, that may sort of offset some of the losses that occur because of any sudden falls. Please correct me if I am wrong with this thinking…. I am not really sure what the *experienced* players do in this situation.

Bullish Bankers July 26, 2008 at 12:05 pm

Heh, well looking back on this post 4 months later is certainly making for some nice entertainment on my Friday night. I like to look back on previous posts to gauge how people are reacting to market news… it’s nice to take the emotion out of trading :)

Silicon Valley Blogger July 26, 2008 at 12:12 pm

Bullish Banker,

Haha! That’s why I make sure my posts have dates on them! :) Then we can all go back in time and compare notes and look upon the events of the past with great nostalgia…. ;)

Dustin Wunder January 13, 2009 at 1:00 pm

You are dead on in saying its good to buy more equities cheaper in down times. It only makes cents ;) People are losing their minds and the media loves pumping drama as well as fear into Joe consumer. So when do we hit rock bottom? In my case, I’m buying every shipping stock I can get my hand on in preparation for not only Obama’s infrastructure plans, but also the growth of China and India. The wise Buffet is buying. Remember (as you were in 2000), be fearful when others are greedy and greedy when others are fearful. I just hope I am wise enough to sell when we get greedy again in a few years.

Trevor – 14 Year Old Blogger February 27, 2009 at 11:36 pm

There will be a bottom but to me its not calculable. I would rather focus my energy on making good investments that will make money in the long run.

Sameer February 27, 2009 at 11:53 pm

Nice article with a good action plan. Your action plan is based on the sole assumption that the economy will have its health restored. I too wish this happens but do you have an action plan for:

A. the worse case: the economy does not recover in the near term or
B. the worst case (as some of the top economists are predicting): the US dollar collapses?

How would you respond to those doomsayers?

Dana February 28, 2009 at 4:19 am

When the market is beginning to show signs of bottoming, it’s definitely a good time to re-assess and possibly re-enter the market. However, I would be really careful about making investment decisions based on technical analysis, as those techniques are reserved for speculators and not long-time investors. Good luck with your investments though! The market might have plenty of surprises in store for us yet :)

Petro February 28, 2009 at 7:18 am

Agree with Sameer.

With the government printing money non-stop and reaching into our pockets more (corporate tax elimination that will translate into higher prices to consumers), buying banks and almost nationalizing other companies, the possibilities of a dollar collapse is very real. This can translate into hyper inflation, and economic unrest, at which time all investments are off!

Scott @ The Passive Dad February 28, 2009 at 3:54 pm

I would agree with you and think now is a great time to find some income producing investments. Investing in real estate as well as advertising costs should continue to provide good value. The hard part is not jumping in quickly and doing some good research first.

Silicon Valley Blogger February 28, 2009 at 4:27 pm

@Dana,

Thanks for your input and thoughts on technical analysis. I don’t make decisions entirely on technical analysis — I always have a long term view. I do study technical analysis just to round out my understanding of the markets. I use it as supplemental information and research I take into consideration before making any decisions, but it’s a pretty small aspect of my decision-making.

For the record, I do take the long view, like to diversify and use indexing, and also apply fundamental analysis to my investment strategies.

Dana March 1, 2009 at 1:21 pm

That is great to hear, and I particularly like your idea of focusing on cash flow.

Talks of bottoming has been going on since last March, and doomsayers are out in droves (boom in doom?), perhaps signaling the so-called “unjustifiable pessimism”? In the meantime, the market continues to hit new lows if not going sideways.

Have you seen excerpts of Warren Buffett’s annual newsletter to shareholders for 2008 that came out this weekend? It’s surprising that even he made glaringly erroneous calls in 2008 on 1) ConocoPhillips, and 2) Irish banks. If this doesn’t demonstrate that investing is not for the faint-hearted, I don’t know what is!

Taxrascal March 1, 2009 at 2:54 pm

One reason a bad economy is so good to investors is that many people give up on picking good investments. So you’re more likely to find an overlooked bargain, since so many bargains are getting overlooked.

But this time might be different: investment banks are laying off so many people that there are bound to be thousands who are unemployed and have nothing better to do than leaf through annual reports and crank out models in Excel. It could be the small-time value-investor’s recession!

Jeremy Day March 1, 2009 at 9:10 pm

Hi,

The market may recover in 2010 or it may not. Even if it does recover, most forecasters aren’t predicting an employment or housing recovery until 2011.

I like to follow this rule, in good times and bad…

“Hope for the best, plan for the worst”

Cheers,
Jeremy

Robert March 1, 2009 at 11:41 pm

I think the predictions of an upturn in the latter part of 09 may be a bit optimistic. I think that current strategies being employed are more likely to cause an extension to the pain. We still have a ton of toxic assets floating around and with derivatives in the mix it means you really can’t be too sure what investments are sound. I think a good strategy would be fleeing to a neutral foreign country, but since that is not an option for me I will attempt to pay down what debt I can and keep my investments limited to my retirement account and my local savings account. Not much else a person of limited financial means can do but just ride it out.

Slinky March 2, 2009 at 9:53 am

A good financial plan should account for good times and bad. Accordingly, I’ve made very few changes to my plans. My one really notable change is moving my eFund into cds at my local credit union. Better rates and nearly liquid with their early withdrawal policy.

Steve @ Start-Up March 5, 2009 at 5:25 pm

This economy is taking a toll on everybody. I really like your list of what to do with regards to investing in this economy. I recommend adding one more: Remember what it’s like to go through a bear market. If you’re taking this very hard, you should consider modifying your asset allocation to an appropriate risk tolerance. This will not be the last bear market.

Stefan February 22, 2012 at 2:54 pm

When a correction is ongoing, you probably shouldn’t be inspired to bail out unless you’re a trader. I certainly wouldn’t, simply because the best redemption moves should be done as part of a “big picture” or longer term strategy and shouldn’t be done in reaction to some event. As much as possible, your investment moves should be proactive rather than reactive.

Silicon Valley Blogger February 22, 2012 at 3:01 pm

You may want to ask yourself if the last drop is but a blip in the charts or something worse…. For instance, where’s that 10% drop to signal a real correction? That would be the time to buy in, if fundamentals are still good.

Silicon Valley Blogger June 12, 2012 at 8:27 pm

Lately, I’ve been looking at the investing strategy called “core and explore”. I have the majority of my investments in a core investment portfolio, while I look to hedge this with more “experimental” opportunities. Thus, I’ve been exploring more aggressive and creative asset classes like precious metals, REITs, and commodities as great diversifiers for a balanced portfolio, but I make sure to cap my funds in these areas to minimize risk.

In addition, I’ve been investigating newer schemes and additional opportunities as diversifiers as well — stuff like p2p lending, an activity that has been picking up some traction in the online financial community. I’ve also been studying stock technical analysis more, using stock charting tools to keep me abreast of what happens in the market.

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