4 Simple Ways to Invest in Volatile Markets

What would you do in the upcoming Autumn Sale? (Spring Sale for my Oz and southern hemisphere friends)

Some shops would actually state when the Sale would end. It gives shoppers a sense of urgency to encourage them to buy now. There are times when I bought games during the Sale (I am a geek after all), some games prices would go up to its normal price after the Sale, but some actually go on further discount, I get frustrated about this as I could have bought more games!!!

volatile marketUnfortunately unlike a Sale, you would not know when volatile markets would end. So with the very volatile market since 21st August, how do I shop for Bargains in this Sale?

I chatted with a good friend last week. He is a professional trader and market maker. He got concerned about my wellbeing when he read my blog post about What to do in a Market Correction. I am glad to have a good friend like him around. We got into a good discussion about how do we buy in a volatile market. Let me share 4 Simple Ways to Invest in Volatile Markets:

1) Regularly Invest no matter the Market is Up or Down

As I pointed out in 2 Simple Ways to Beat the Market, if you invest regularly in Index Funds or Great Companies whether the Market is going Up or Down, you would easily Beat the Market.

2) Invest in Tiers when the Market is Down

Before the market turned volatile last Friday, I had about 30% of my portfolio in cash as dry powder. As I mentioned in How to weather a Market Correction, I always keep enough dry powder to take advantage of market volatility. Let’s assume that 30% is £100. My plan is to invest them as follow:

Market Drop From HighAmount to Invest
Total Amount to Invest (Dry Powder)£100
10%£15
20%£20
30%£30
40%£20
50%£15
PowderFool Tiered Investing for Volatile Markets

 

After last week, I have deployed 10% of my dry powder, slightly lower than the target I am aiming. Unfortunately the market has bounced back up temporarily so I have to be patient and wait for another opportunity next time.

I must also credit this strategy to Morgan Housel, as my old strategy used to be an equal percentage deployment for every 10% drop but after reading his articles, I modified my percentage slightly to the table above.

3) Invest after the Market Bottoms Out

My good friend is a strong advocate of this strategy. He quoted,

“Markets go up the stairs and down the elevator”

He makes a good point about being patient and jump in only when the market starts to rise again.

Mathematically, this would be the best strategy as you get the gains from the increase in share price. However in practice I think this is really hard to do unless you got a working crystal ball or a really “good feel of the market”.

With a Volatile Market, I don’t know how much the market is going to fall, whether it is 10%, 20% or even 50%. There are certainly criteria that you can set so that you invest after a certain period where the market is rising, this might work.

However personally I recognize that I am not good at timing the market, so I prefer the tiered investing approach mentioned above.

4) Do Nothing

This is definitely the worst option financially, however it could potentially be the best option psychologically depending on your personal circumstance.

If you are stressed about the market, or if you are new to investing, it is really tempting to just jump in and out of the market to make a quick profit. Especially with most news media emphasizing about the short term profit and loss these days.

Take your time and learn how to Invest the Right Way.

The market is always there and there would be more opportunities in the future.

Do it Right and make the Market work for you!

Which is the Right Way?

The right way would be based on your personal circumstance.

We (My trader friend and I) concluded that Leverage is the key difference when one invest in volatile markets. With leverage, you have less leeway to be wrong. The market can be irrational as Benjamin Graham quote:

In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine

If one over-leverage and the market move against him, one would cripple himself financially and it would take a long time to recover.

What if I start investing at Market Peak?

If I start investing at August 2000 right before the dot-com bubble burst and keep investing through the subprime mortgage crisis in 2007 till today August 2015. I would still make a modest 3.6% per annum gain over this 180 months. It’s not a lot but it’s better than the banks interest at current climate.

The main point is:

Even if you invest at the worst time, as long as you invest for the long term, the probability of making a gain is 100%.

What do I do?

Personally I Invest in Tiers when Market is Down and Regularly Invest when the Market is Up.

What do YOU do?

I am interested in how you invest, or if you have any questions, please leave your comments below.

If you are new here, check out the Ultimate Guide to Invest Successfully.

 

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