How to Invest in Volatile Markets

The VIX “fear index” has been moving up as 2020 approaches. Many believe that a market slowdown is the best we can expect in the coming year while many others expected ever-increasing volatility and a major correction. The issue for long term investors is how to invest in volatile markets.

As the bull market ages, investors are not only worried about their investments next year, many investors are scared to death, according to CNBC Trading Nation.

Stocks may be at highs, but investors could be acting overly cautious heading into 2020.

Even more than that, they are acting as though they are “scared to death,” says Jeff Saut, chief investment strategist at Capital Wealth Planning. He says most of the investors he talks to fear what may come in the New Year.

While the analyst goes on to reassure readers that this secular bull market is likely to last longer, this is not the opinion of many of today’s investors. When uncertainty looms, volatility increases. Here are some thoughts about how to invest in volatile markets.

How to Invest in Volatile Markets

The first part of investing during periods of volatility is to reassess what you are investing in and the timing of your investments. Forbes offers their 5 best investment strategies for volatile markets.

Building a Cash Reserve during Periods of Investment Volatility

In our article about a silent warning for investors, we noted that Warren Buffett is accumulating huge stockpiles of cash at Berkshire Hathaway. Buffett is not finding his usual mix of the best stocks to invest in based on intrinsic stock value (forward-looking cash flow and low market price). This situation with Buffett is similar to the period before the dot com crash when he pulled money out of the stock market because he said it did not make sense.

Forbes also notes that building a cash reserve is a good idea as it lets you take advantage of a market downturn by buying again at a discount!

Investing in High Dividend Stocks

Dividend stocks should be part of any investor’s portfolio as they provide income even when their share prices fall in a market correction. And, such stocks are likely to fall less in a bad market because investors are buying them for the income as much as their growth potential. Read our article about choosing the best dividend stocks for a few tips on how to avoid pitfalls in dividend stock investing.

Value Stock Investing When Markets Are Volatile

The problem right now with value stock investing is that the market and the leading performers are overpriced. This is why Buffett is building up such a hoard of cash. Nevertheless, if you are investing for the long haul (until retirement and beyond) you can dollar cost average your investments with true value stocks and expect to see long term profits. As an example, the S&P 500 peaked in August 2007 at 1552 and bottomed out in April of 2009 at 826. Anyone who bought this index at the low point has seen their investment quadruple to 3168. However, even investments made at the high point have doubled by now. The point is that if you are in the market for the long haul, in well-chosen stocks, you will make money. And, if you invest steadily with a fixed dollar amount, you will profit in the long term.

Out-performing Sectors and REITs When Investments Are Volatile

We added these two of Forbes’ suggestions as one category. In these cases, you are looking for broad market sectors that are protected from the trade war and areas like managed-real estate that tend to keep making money no matter what the stock market as a whole is doing. In each case, you need to do a bit of homework in order to pick and choose the best investment. For the majority of investors, building a cash reserve, buying and holding solid dividend stocks, and buying value stock using dollar cost averaging are probably your best bets for how to invest during periods of volatility.

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