How to Handle Market Swings
Written by Sam Engelman
Over the last two months we have seen market volatility that would make the most experienced financer sick. This crazy roller coaster of 1% up and 1% down has not been seen since the market crash of 2011 and even then it was not as bad in duration.
While the market seems to be back on track, fear and apprehension are definitely present, which means more volatility. Options traders and crazy day traders, like myself, love this volatility, but most are risk averse and would prefer to avoid these swings. This is a common idea yet a foolish one. You don’t have to trade millions of shares or on a second to second basis, but you can ride the market and make lots of money. The key is time frame, objectivity, and a strong stomach.
First is time frame. If you are over 50 years old, stop reading. These strategies would be potentially fatal for your portfolio. However, my guess is that you are about 19-22 years old, so you have a solid 40+ years till retirement. If you chart the S&P 500, you will see that even crippling market collapses and crashes recover and continue to grow. This means that you can buy risky stocks and hold them through market crashes and they should recover and continue to gain.
For those who grasp this concept, a new opportunity opens up: growth stocks. When the market crashes, most company prices drop despite their performance; this means you can buy a grade-A stock at a much lower level and then wait for the market to recover. The market always recovers so you will almost always make money. This is how Warren Buffet made billions in 2008 and 2009.
Secondly, if you plan to buy depressed securities, you are playing the swings, so you have to chart and gauge the market. From this set a buy price and wait; if it hits the price buy, but if it doesn’t, don’t buy. This can be maddening but it helps control your emotions and maintains objectivity.
This is key in down markets; while the rest of America is in panic mode you must maintain composure and buy up all the “gold” securities they are dumping for next to nothing. Remember the greatest source of wealth in the world is the foolish man. Exploit the market when people are fearful and pull back when they think it’s all roses.
Lastly you have to have a strong resolve to ride the ups and downs of a volatile market. You may be tempted to sell when the price jumps or to sell when it drops even lower than when you thought. If it jumps, be happy you are in the green and don’t try to repeat the same performance on the same stock, then find another gem to invest in. If it drops, re-evaluate and if you still believe in the security, buy more. There is no right answer to the market; the wise man will always make money and the fool will always waste it.
So to sum it all up, the swings in a market are not be feared. Unless you are approaching your liquidation horizon, they are a great opportunity. A perfect example of this is MGIC (MTG). They dropped to $0.78 in 2012; they are a strong company with plenty of cash and a strong business plan, and as of today they are at $8.93! That is more than a 1000% return on investment. You can do the same if you have the time frame, the analytical skills, and the resolve to stick it out. If you have these you have huge potential for growth. Just remember the world is for those who have the courage to take it.
*These are opinions and are intended as sound investments advice. When making financial decisions rely on your financial planner.