Volatility Is Here To Stay—Here's How To Profit
Earlier this month I introduced you to the guy I think of as my find of the decade.
His name is Leon Wilfan.
This is the guy I’m listening to as I work to expand my stock portfolio in the face of the current turmoil on Wall Street… and I strongly recommend that he’s the guy you need to be listening to, as well, for a safe and prosperous 2019.
Leon doesn’t use the methods you hear about from the talking heads. His is a strategy born of long experience with multiple triple-digit hits to back it up.
Leon began a successful investment career before he was allowed to drive a car…
That led him to an MBA at a prestigious Vienna university…
Brace yourself. Volatility is here to stay.
With the recent market sell-off, Brexit looming over Europe, the U.S.-China trade dispute, and an ongoing U.S. government shutdown, markets are in for a bumpy ride in 2019.
CBOE’s Volatility Index (VIX), known as Wall Street’s “fear” index, which had been steadily falling for most of the last decade, reversed direction in 2018 and is reaching levels we haven’t seen sustained since August 2011 (Black Monday) and the 2008 financial crisis. Last week’s average put the VIX at 18.51, above its long-term average of 18.42.
The media isn’t helping the situation. In the last week alone, financial pundits have predicted everything from another Great Depression to all-time stock market highs in 2019.
If it’s all translating into sleepless nights for you, you’re not alone. Here’s how I recommend you manage the situation:
1. Don't Panic
One of the most common mistakes investors make when dealing with volatility is giving in to panic and closing a position during a sell-off. The easiest way to avoid this is to resist checking your profit/loss on a constant basis. You should never make investment decisions in a moment of panic, and seeing your profit and loss statement fluctuate frantically could lead you to do just that.
Maintain confidence in your investment decisions and strategies. Look at the long-term picture and avoid obsessing over the market’s daily performance.
2. Don't Listen To The Gossip
Filter the information you receive from friends, social media, and television. These channels tend to focus on the most dramatic events and can’t help but be biased. It’s just noise, so treat it as such. Do your own research and your own thinking, make your own decisions, and then hold fast to them.
3. Don't Put All Your Eggs In One Basket
Diversification is the single most important principle in investing and a defense against price fluctuations. By having your portfolio diversified across different assets, you reduce risk and correlation to the rest of the market. If one of your investments drops, the effect on your holdings overall will be limited. Moreover, a market event that proves negative for one of your investments could be positive for another. The relationship between precious metals and stocks is one example of two asset classes having a negative correlation.
These are fundamental principles, but in very volatile times it’s important to remind yourself of the fundamentals.
4. If You're Close To Retirement, Focus On Conservative Investments
The closer you are to retirement, the more your focus should be on reducing risk in your portfolio. Avoid IPOs, new technologies, medicine, pink sheets, and so on. Anything shiny offering a potential for high yield likely comes with an elevated level of risk. If you’re near or in retirement, stick to conservative investments with low volatility and a history of steady returns, such as certificate of deposits, investment-grade bonds, blue-chip stocks, and utility stocks.
This kind of investing may seem boring, but, I assure you, there’s nothing boring about a solid, safe, and steady investment return in retirement.
5. Consider Alternative Investments
You can avoid stock market volatility altogether by considering other investment options, such as market-neutral exchange-traded funds (ETFs), certificates of deposit, or money markets.
CDs and money markets offer the greatest protection from market volatility but come with the lowest returns. In the current environment of historically low interest rates, it’s hard to make a case for them, though they did fare a lot better than the stock market in 2018. With interest rates on the rise, low inflation, and increased volatility, however, CDs and money markets might be the perfect solution for 2019. U.S. T-Bills offer yields of around 2.5%, while those of CDs are at about 2.75%.
Market-neutral ETFs, or long/short ETFs, hold equal amounts of long and short stock positions and offer a neutral exposure to different sectors, markets, and countries. Thanks to low correlation with rest of the market, long/short ETFs tend to underperform in bull markets and overperform in bear markets.
I suggest you consider AGFiQ US Market Neutral Anti-Beta Fund (BTAL). Despite double-digits returns over the last five years, it underperformed the market up until volatility picked up in 2018. The fund’s current one-year returns are 15.20%, showing that it handles volatility well and should continue to overperform in 2019.