5 Ways To Survive A Volatile Stock Market

What we’re doing during uncertain times like these.

With all the tossing and tumbling the stock market is doing these days, we’re becoming more vigilant, and more excited. At home, we’ve been having more debates about what should we be doing as things appear more and more uncertain 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, throughout my investing history, whenever things have become uncertain like this, I’ve only done one thing, and that was to build our position in equities further by buying more shares when they got cheaper. It was comfortable to dollar cost average down because youth was on our side and we weren’t really bothered as much by the volatility. 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 turned out pretty well.

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. As I worked in a startup at that time and felt the hype and frenzy of internet stock fans at work breathing down my face, I felt 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, with limited cash flow and income. 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 is looking a little too stodgy. So we’re evaluating possible moves.

What can we do during this current market phase?

#1 Wait for a buying opportunity and increase our equity position.
Do what we’ve been accustomed to doing all our lives, which is to wait for a buying opportunity when the market weakens and take advantage of a developing market correction. If stock indexes go lower from this point, there is a chance we’ll be shifting some spare cash over into stocks. Spare cash here is anything we can afford that is not earmarked for our business capital budget.

#2 Hedge and get into new or underrepresented asset classes.
We haven’t been as sophisticated about trying out other asset classes such as gold or currency plays. But we want to hedge our equities portfolio better so we are considering adding weight to areas that we have a bit more familiarity with and which may benefit from current market trends: real estate and international equities. It’s a possibility that as the real estate market weakens further, that investment opportunities pop up in our local area. We may think of pooling our resources with friends to get into rental properties. Or more likely and primarily for the simplicity, we may just carve out a position in REITs. Another move would be to raise the allocation of our international equities from roughly 10% to a maximum of 25%.

#3 Rebalance our existing portfolio.
We can also do the simplest thing and just rebalance our portfolio after the recent market shifts we’ve seen. This would just entail staying with our intended allocations and making sure our investments are still conforming to their stipulated amounts.

#4 Sell and lighten our position.
I’ve had some arguments with the spouse on this one. For some reason, he’s somewhat convinced that the issues with subprime mortgage lending will spill over and create greater havoc everywhere else. Gee, wherever could he be getting such ideas? He’s nagged me about “selling” equities in favor of other investments (see #2). I think I’m going to relent. We’re planning on moving our most concentrated single stock investments into the diversified total stock market.

#5 Sit tight and do nothing.
This is a prerogative that you have during crazy times like these when we hear that certain parts of the economy are unraveling. Stay put and stay the course. It’s also called “buy and hold”. Given that, 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 and see if we can capitalize on these changes in the financial and investing landscape.

In Conclusion

Because of what’s afoot these days, we intend to do some readjustments to our portfolio. But first, I’ll need to do a portfolio review and see if we have enough funds to get into additional investments. Beyond this myopic view, we’ll also have to take a step back and see our household’s big picture and consider the risks we’re taking with my spouse’s fledgling startup business. This will be a good time to check how we can evaluate our overall finances against his entrepreneurial visions. Once I determine our current situation in detail, we’ll know our next steps. For now, this material is just to open the discussion for possible changes to our existing financial strategies.

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