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Keep Calm and Trade On When You Encounter Market Volatility

Keep Calm and Trade On When You Encounter Market Volatility
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Thursday, 24 August 2017 03:44 PM Current | Bio | Archive

One of the greatest pleasures I get is seeing folks take control of their finances and start investing with an eye towards growing their wealth.

Last week, I helped a friend set up a 401(k) at a new job. I didn’t need to do much. The paperwork isn’t onerous. I mostly just had to be supportive, explain a few things, and encourage them to get through the paperwork as quickly as possible.

But I did get one question that’s in line with one I hear from seasoned pros as well: “What should you do when stocks fall?”

My advice is pretty simple in theory, although it can be hard to implement if you let your emotions get in the way. My thinking goes like this: Stocks periodically pull back, and that’s a good thing. Without those declines, we couldn’t be able to shake out speculations and poor trades. When traders see stocks going down, they take stock of what they own and why they own it.

Over the longer term, stocks move in an upward trend. So if you use pullbacks as a buying opportunity, you can get better returns. And, since you’re paying a lower price than you would have otherwise, you have a lower risk of losing money on a trade.

For most folks who just passively invest via a 401(k) or make regular contributions to an investment account, the best course of action is to do nothing. When stocks do fall, your contribution will allow you to buy more shares for the same dollar value than it previously did.

Most investors may think about their investment goals with retirement in mind. But up until you do retire, investing is ultimately about accumulating as many assets as possible at the best possible price. Lower prices mean your dollars go further—just like buying things on sale at the grocery store. That’s why corrections, while painful to watch in terms of your existing net worth, are really opportunities in disguise.

Someone who regularly sets aside money from their job into a tax-deferred retirement plan can make tremendous strides towards their financial wealth by simply continuing to invest and ignoring market pullbacks. Over decades of investing, periodic moments of panic in the market will be the exception, not the rule. Even the Great Recession from 2007-2009 lasted only about 18 months from peak-to-trough.

Yes, it was the biggest market pullback since the Great Depression. And there will be other pullbacks in the future. Simply staying the course and not making any changes while things are going haywire goes a long way to preserving and growing wealth over the long term. It’s a marathon, not a sprint.

Investors who want to be more active can take better advantage of lower prices. Consider the following…

The broad market will have a 10 percent pullback from its highs around every year on average. By that measure, we’re a bit overdue at the moment, and may see a pullback in the fall. As stocks get close to a 10 percent decline, that’s where a big buying opportunity occurs. That’s true for the overall market.

For individual stocks, the past few years have been a tremendous opportunity to buy out-of-favor names while they’re in the market’s doghouse.

That’s been the successful strategy behind the Braintrust Alliance service. We boost our returns on this investment strategy even more by employing option writing. We can get a better return for lower risks when we’re selling put options to get a discount when trying to enter a trade.

And that’s also true with selling covered-call options on a position we own that’s rallied as well. Depending on the company and the volatility of the shares, options returns from put-selling and covered-call writing can provide anywhere from 8-20 percent per year. That’s often better than the market’s average annual return.

Again, this is a strategy that works on individual stocks independently of the broad market. While the stock market indices are near all-time highs, many individual names haven’t gone along for the ride. That’s created a huge opportunity in individual names over the years.

The important thing about handling a pullback is to keep your emotions in check. It’s not easy, and you won’t be 100 percent successful at doing so. That’s OK.

What matters is reviewing what you own and why you own it. If the fundamentals of the company haven’t changed, there’s no reason to sell out in a panic just because shares are going down now. If a company is making big changes to its core business or its strategy for how it goes about its business, however, it may be time to take profits (or losses) and move on to a better opportunity.

Ultimately, it’s one of the few truisms about investing out there. Keep a cool head when things are going haywire in the stock market, and use it as an opportunity to buy oversold names at a much cheaper price. It doesn’t matter if you’re doing so via a passive retirement account, or actively with individual stocks. Lower prices mean lower risk, higher initial dividend yields going into an investment, and a lot of fear that will fade in time.

And as for right now, while markets are still near all-time highs and look complacent? Now’s the time to build a watch list of companies you’d like to own for the long haul. Firms with long records of surviving and thriving during tough times. Companies with decades of continual earnings and dividend growth behind them. Those are the best names to buy on a pullback for long-term success.

In short, things look rosy now. It won’t always be that way. But when it isn’t, it doesn’t last that long, but the opportunities that emerge can become life-changing for you and your wealth.

Embrace the change.

Learn to take advantage of market declines. They’re going to happen anyway, you might as well profit from them!

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2019 Newsmax Finance. All rights reserved.

   
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AndrewPacker
The important thing about handling a pullback is to keep your emotions in check. It’s not easy, and you won’t be 100 percent successful at doing so. That’s OK.
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Thursday, 24 August 2017 03:44 PM
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