Volatility Is Your Friend

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Options Broker 2020!
    Great Choice For Beginners!
    Free Trading Education!
    Free Demo Account 1000$!
    Get Your Sign-Up Bonus Now!

  • BINOMO
    BINOMO

    Only For Experienced Traders!

Volatility Is Your Friend—Here’s How To Profit From It

Volatility Is Your Friend—Here’s How To Profit From It

Your Best Strategies For A Volatile Market

Turbulent times are upon us.

Volatility has returned to the financial markets with a vengeance and finding opportunities to profit is now much harder than it was just a few years ago.

Five years ago, you could have created a portfolio of random blue-chip stocks and been positioned to double the value of your portfolio.

Follow that strategy today, and, five years from now, your portfolio could be worth half as much.

“But the economy is doing so well,” you might be thinking to yourself.

Yes, the economy is doing well, but the economy is not the same thing as the stock market.

Economic data looks to the past, what has happened… while the stock market tries to anticipate the future, what will happen.

When the future looks prosperous, investors become greedy and buy stocks. When the future is uncertain, investors become fearful and sell stocks.

Remember the Great Recession? It took one year, from the S&P 500’s market top in October 2007, for GDP data to signal negative growth. By that time, the market had declined by 25%.

The same thing happened during the Dotcom Bubble. The S&P 500 dropped by more than 18% before the government released the first negative GDP figures.

We’re living through a similar situation right now. The GDP is already up by more than 3% since the start of the year, while the S&P 500 has barely increased by 0.5%.

But you shouldn’t be concerned. Volatility doesn’t mean you should stay out of the stock market. It means you must be more selective when picking your stock investments.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Options Broker 2020!
    Great Choice For Beginners!
    Free Trading Education!
    Free Demo Account 1000$!
    Get Your Sign-Up Bonus Now!

  • BINOMO
    BINOMO

    Only For Experienced Traders!

2020 was a year of increased volatility and lousy stock market performance. The S&P 500 closed the year with a minor 0.73% loss. Yet, not all sectors performed poorly.

If you had invested in the consumer discretionary sector, your return for the year would have been 8.31%. Of course, if you’d invested in the energy sector, your investment would have lost 23.55%.

For most of 2020, the information technology and consumer discretionary sectors have been beating the market, while consumer staples and telecommunications have performed the worst.

Explaining Market Cycles

This has to do with market cycles.

Each economic cycle can be divided into four phases: early-cycle, mid-cycle, late-cycle, and recession. There’s no clear line when one phase ends and another begins. They transition one to the other fluidly.

During the early-cycle, the economy is recovering from a recession, monetary policies are easing, and markets remain volatile. In the United States most recently, this period lasted from 2009 to 2020.

When the economy is in the mid-cycle phase, sectors like consumer discretionary and basic materials, as well as high-growth sectors like information technology, tend to outperform market averages.

That’s because, during the mid-cycle phase, the economy is in full swing. There is a robust demand for basic materials. It’s easier to get credit, and businesses invest money to expand operations or repurchase shares, lifting the stock market overall.

Unemployment falls, and wages expand. This is a time of overoptimism, when people spend money on things they don’t need and invest in high-growth IT companies.

In the United States, first signs of the economy entering the most recent mid-cycle appeared around 2020.

Today we are in another transitionary period. GDP is still growing at a fast pace, but more and more late-cycle signs are emerging. The stock market is very volatile, company valuations are high, monetary policy is tightening, the economy looks to be overheating, and inflation is rising.

The way to play the late-cycle game is to look at sectors that tend to underperform during the mid-cycle and to over-perform during the late-cycle. Defensive sectors, like consumer staples and utilities, are your best bet. That’s because people use electricity, gas, food, and household items no matter how well the economy is performing. The demand is more or less constant. That’s why these aren’t your best investment options when the economy is booming and why they can be when it’s slowing down.

If you compare sectors, you see that this transition has already begun.

Since the market peaked at the beginning of October, consumer discretionary and information technology, two of the best-performing mid-cycle sectors, have turned into two of the worst performers, declining by 10.7% and 11.8% respectively, while the overall market dropped by only 7.7%.

On the other hand, consumer staples and utilities have performed the best, gaining 3.4% and 3.3%, respectively. This is your sign to enter these two sectors and protect yourself from the market volatility still to come.

One way to play this would be to invest in a sector fund, for example those from SPDR and Vanguard. Take a look at XLP (SPDR Consumer Staples), XLU (SPDR Utilities), VDC (Vanguard Consumer Staples), and VPU (Vanguard Utilities).

However, my strong recommendation is that you look at foreign countries, where market cycles can operate independently of those in the United States, creating opportunity when you most need it.

Specifically, for example,В I have identified an IT company from a country in mid-cycle phase that I believe is an excellent investment right now.

Volatility is your friend

The ups and downs of small cap investing are best exploited by investing in a mutual fund dedicated to them

By Dhirendra Kumar

Value Research Stock Advisor has just released a new stock recommendation. You can click here to learn more about this premium service, and get immediate access to the live recommendations, plus new ones as soon as they are issued.

Only small cap investing is real stock investing. That sounds like a provocative statement, worded more to surprise than to tell the literal truth. I don’t normally like to write such things but I do believe in this one. I’m not saying that buying stocks such as Reliance Industries or ICICI Bank is not equity investing. Of course it is.

What I’m saying that is that if the experience of buying a stock is to reflect owning a business and prospering with it, then the only way to experience it is to buy a small cap and then watch it grow into a midcap and then a large business.

To understand what I’m trying to convey, investors must consider what they expect from equity investing and whether they are willing to put up with the risk and the volatility that is an inevitable part of the same package that also contains great returns. Investment advisors and analysts often ask investors to evaluate what kind of risks they are willing to take in order to have a chance of getting the kind of returns that equity is capable of. It’s an open secret that in answering this question, most investors lie to themselves, even if unwillingly.

Small cap stocks and the mutual funds based on them have been going great guns for at least five years now, specially in contrast to the lacklustre performance of the large cap stocks and the funds that invest in them. Fund investors have been pouring money into funds that invest in smaller companies. And they’ve not been disappointed–you can read about how well these funds have been doing and how you can still land yourself part of the bonanza.

However, to do so and not get spooked by volatility, one must keep the fundamentally volatile nature of small cap investing in mind. When an investment is doing well, it’s natural to be full of bravado and be sure that you will take any volatility in your stride because you understand the nature of equity etc., etc. Equity investing seems like the easiest thing and the world, and those who talk of risk and volatility appear to be nervous ninnies. However, when the markets start declining and the value of your investment starts going down every day, then the answer to that question about risk-taking changes, as it should.

When that happens, what should investors do? Should they quit and run (perhaps switching their investment to large cap funds), or should they stick it out? For some investors, if they feel they can’t take the volatility, the answer has to be that they should not invest in small-cap funds. However, the right way to approach the whole thing is slightly different. The first principle is also the oldest one, which is diversification.

And the second principal, no less important, is to understand that volatility is actually your friend if you are investing in small cap equities through mutual funds. The universe of small cap funds is much larger than large cap ones and an individual investor cannot make sense of it except through mutual funds. More importantly, only if you invest through an SIP can you benefit from the volatility that is an inherent part of small cap equities. Consider this: over the last five years, a typical high-performing large cap fund (SBI Bluechip) has had simple annualised returns of 15.8% and SIP returns of 19.7%. Over the same period, a typical high-performing small cap fund (Franklin India Smaller Companies) has simple annualised returns of 24.6% but SIP returns of 32.0%. Compare the differential.

Regular SIP investments through a small cap mutual fund actually exploits volatility and enhances returns. That’s what equity investment is all about!

Please click “I am not a robot” to continue

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.

If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Options Broker 2020!
    Great Choice For Beginners!
    Free Trading Education!
    Free Demo Account 1000$!
    Get Your Sign-Up Bonus Now!

  • BINOMO
    BINOMO

    Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Trading Library
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: