What’s an investor to do in volatile times?
A number of United States investment market index milestones were reached in the last few months.
According to TD Ameritrade — MarketWatch in early January, 2018 “retail investor exposure to stock markets is at an all-time high”. This participation statistic was published around the same time that the Dow Jones Industrial Average closed atabout 25,000 for the first in history.
Since that event, wholesale swings in market values of 700 to 900 points, sometimes in a matter of minutes, rather than a day or week are becoming commonplace.
Comparisons are not easy to make with historic events such as on October 19, 1987, when the stock market collapsed — down 508 points. The Dow plunged an astonishing 22.6 per cent, the biggest one-day percentage loss in history, well to remember that the Dow stood at 1,738.74 compared to the 25,000 new height threshold.
The causes of this volatility have been variously ascribed as driven by unsolicited tweets, uncertainty, mentioning of war, trade-tariff driven verbiage and more.
No final results, yet, on this week’s US capital market performance as this article went to press before Friday the 13th witching hour.
What can we make of these markets? How do we cope with these completely unpredictable (or maybe they have become predictable on Twitter) market swings and their impact on our investments.
I don’t know about you but when a reasonable investment position in a considered-solid company stock, or a mutual fund (holding said position) suddenly takes a veritable plunge in value because its business model, indeed, its very existence is being Twitter-challenged, such an event is extremely disconcerting to a small investor.
After all, we have been thoroughly schooled in general investment theory through multitudinous finance talk shows, newsletters, books, webinars, adviser presentations, blogs that emphasise serious research, years-long tracking, index performance comparisons, reading of company audit reports, analysts’ expectations and the like — to find the best investments, with the best returns (and least risk for your personal profile) at the best price.
Remember modern portfolio theory? We’ve been guided by these tenets for as long as I can remember. Modern portfolio theory says that it is not enough to look at the expected risk and return of one particular stock. By investing in more than one stock, an investor can reap the benefits of diversification — chief among them, a reduction in the riskiness of the portfolio. MPT quantifies the benefits of diversification, or not putting all of your eggs in one basket.
What about the buy-and-hold investment strategy, a passive strategy espoused by Warren Buffett — where an investor buys stocks (or other securities) and holds them for a long period of time, regardless of fluctuations in the market, short-term price movements and technical indicators.
Should one consider the more complex quantitative investment model used by quants (individuals) who build complex mathematical models to detect investment opportunities utilising the computer to execute actual buy/sell positions, tending to remove any human emotional response from the actual trading decisions. According to Investopedia, off-the-shelf plug and play programs are available.
No matter the method, it is almost a certifiable fact that market investors hate constant uncertainty. You can’t plan for all of it. And when volatility spikes without notice and some would say without any reason whatsoever, except whims, guess what happens? Reasonable people decide to flee to safety, liquidating perceived riskier stuff and purchasing US Treasuries (and/or other country high-grade sovereign debt) because US sovereign debt is generally considered a safer investment.
My thought is this. No matter what is triggering current investment market volatility, if investors are feeling heightened anxiety, they will leave the game, even if temporarily. The appetite for investing has declined according to TD Ameritrade’s Investors Movement Index where three months later at March end 2018, the index moved downward from 8.59 to 5.22 data points.
Investors may choose to cash out or reposition into safer less-risky positions such as US Treasuries — lately, various maturities have been selling at discount to par value. It is rumoured (not confirmed) that China (a very large buyer of US Treasuries) may have decided to stop their US Treasury purchase plan.
Thus, it is assumed that market investors selling out volatility to purchase safer US bonds will keep those dollars flowing into the US cash box in order to maintain that burgeoning overspend budget ($1.3 trillion).
So, what is the small investor supposed to do?
Readers, I wish I had a definitive answer, but I do not.
Certainly, it would appear that no, or hardly any, small investors would deliberately accept more pain, before things get better.
• So, we can focus on the usual investment caveats. They are still logical and true.
• Be very alert, be very aware, get your internet and investment access tuned up to the highest monitoring level.
• Don’t put your money in any investment that seems even remotely risky.
• Take smaller investment positions. Diversify, diversify even further than your current allocations. • Research every area, website, newsletter, that you can find for validation (or not) of investments that interest you. This website, www.quantumonline.com, is a great unbiased site for individual stock and bond details.
• Gear yourself to use reality thinking not emotional reaction to these events.
And maybe, you will just have to grit your teeth, accept that social media comments are just another market disrupter that will not in the long-term co-opt your investing goals.
Just some thoughts from a very, very small investor with an inquiring mind.
Modern portfolio theory: why it’s still hip, Ben McClure, https://goo.gl/AzweMg
Warren Buffett: https://en.wikipedia.org/wiki/Warren_Buffett
Quant strategies — are they for you? Michael Schmidt, Investopedia, https://goo.gl/qxyQxD
Retail investor exposure to stock market is at an all-time high, TD Ameritrade, https://goo.gl/5eaScd
Investor Movement Index®, TD Ameritrade, https://goo.gl/JX8Lus
• Martha Harris Myron CPA, JSM: Masters of Law — International Tax and Financial Services, Pondstraddler Life™, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Personal financial columnist for The Royal Gazette. Contact firstname.lastname@example.org
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