You can keep a brave face if you’d like, but I’m going to get straight to the point: the market volatility has been undeniably disastrous this month. So far in December, the benchmark Dow Jones Industrial Average has dropped more than 8%. For the year, the index has unwound prior optimism, losing almost 5%.
What’s worse, investors should brace themselves for further pain. Since the start of October when the broader rout began, down sessions have averaged 1.2% losses. On the flipside, up days average just under 0.9%. Invariably, the hard numbers demonstrate that the bears have greater control of the markets during this winter season.
However, such stark realities don’t mean that you must silently endure the market volatility. On the contrary, you have more options at your disposal than you might believe. There are ways to invest money in a volatile market. A bear market simply requires a different mentality than what we’ve grown accustomed to over the years.
Below are five of the best investments to take advantage of a volatile market:
Seek Blue Chips on Steep Discount
One of the obvious benefits of a volatile market is that virtually all stocks to buy are on discount. Personally, I look at this situation as a “time-capsule” opportunity on blue-chip stocks that I missed on their way up.
Blue-chip stocks are some of the best investments. And we’ve all experienced the pangs of regret when we’ve watched our target asset climb higher and higher. But during that initial period of enthusiasm, we failed to secure a position, believing that a correction is due. Unfortunately, that correction never came. By the time the dust settled, the stock is too expensive for consideration.
A prime example is Nvidia (NASDAQ:NVDA). For the last three years, the semiconductor stock has defied gravity. Prior to the recent selloff, NVDA stock appeared destined to yet again deliver stunning returns. You know what happened next.
But in this market volatility, I think it makes sense to pick up shares. On paper, NVDA remains one of the most fundamentally-sound semiconductor firms available for equity ownership. Additionally, its core businesses of gaming-specific GPUs and automation/artificial intelligence offer viable, long-term upside.
Avoid Overexposure to Speculative Names
I know what you’re thinking: isn’t this the guy who writes extensively on marijuana stocks? What does he know about restraint against speculative companies?
Admittedly, it’s a fair point. However, let me clarify that I’m not recommending avoiding high-risk, high-reward opportunities altogether. Certainly in a down market, the less-resourced organizations on paper offer the steepest discounts. What I’m suggesting is to not go overboard.
Despite the attractive price points, growth companies who don’t have the strongest balance sheets suffer badly in bearish environments. Virtually all publicly-traded companies go through lean periods when investors panic en masse. The smaller firms, though, lack the capital to see them through the turbulence effectively.
Moreover, we can reasonably expect a sustained flight to safety. According to CNBC, a record number of investors rushed into bonds due to a poor outlook on the global economy. Obviously, this trend indicates that any equity will likely incur volatility. However, fundamentally weak companies represent money traps as their leadership teams must address the acute, broader crisis before tackling internal problems.
That’s why I wouldn’t mess around with dead names like Sears (OTCMKTS:SHLDQ). Lean more towards the stronger outfits, and you’ll thank me in five years’ time.
Since finding bottom in early 2009, the benchmark exchange-traded fund SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has more than tripled in value. In such an environment, everyone looked like a genius stockbroker.
But when the smelly stuff hits the fan, sound money-making strategies as opposed to gimmicks will see you through. At this juncture, one of the best things you can do is change your mindset. Specifically, making the best investment involves trimming cyclical stocks and focusing heavily on secular names.
By secular, I’m simply referring to long-term trends that remain largely consistent, irrespective of seasonality. The key here is indispensable demand. No matter what happens to the markets and the economy, people require essentials, such as food, water and shelter.
Secular demand is the central reason why utility stocks have comparatively soared this year. While the sector has taken a hit just recently, it’s better positioned than most to advantage the downturn; that is, they pay dividends and feature a consistent revenue stream.
Watch the News
You should watch the news anyways to remain educated on current events. But as an active investor in a bear market, observing broader trends will help you attain profits down the line.
Perhaps the most worrying headline over the past few days is Russian military aggression. Last week, two Tu-160 “White Swan” strategic bombers touched down in Venezuela. Russian officials stayed coy on their true intentions for this western-hemisphere excursion. However, it’s easy to read between the lines.
The White House has threatened to pull out of Intermediate-Range Nuclear Forces Treaty, claiming that Russia violated its terms. In response, the Russians are letting us know that they can strike us in our own backyard. Furthermore, Venezuela’s government has an unfriendly posture to the U.S.
To quote coach Dan Devine from the epic sports film Rudy: “No one, and I mean no one, comes into our house and pushes us around.” A military build-up and aggressive foreign policies appear like foregone conclusions. Therefore, I’d currently consider buying on discount defense contractors like Raytheon (NYSE:RTN), Lockheed Martin (NYSE:LMT), and Northrop Grumman (NYSE:NOC).
Above All Else, Don’t Panic!
It’s an obvious and expected statement. Nevertheless, I think it’s worth repeating, especially for younger investors. Panicking is never ideal, but it can be devastating during volatile markets.
For one thing, you’re selling at a very inopportune moment: when everybody else is doing the same thing! Ideally, you want to sell into strength, when few suspect any troubles.
More importantly, you’re missing out on potentially life-changing opportunities. Back during the Great Recession, I moved in the opposite direction of my co-workers. Rather than crying over spilt milk, I ramped up my investments.
For a few years, many of my picks seemed to go nowhere. But in the long run, I did very well. And although I didn’t have as much money to play with, the leverage from the deflated prices increased my profits substantially over time.
Yes, I agree with you that the red ink hurts. Please remember though that in this pain is also your opportunity.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.