When the stock market is volatile, it's best to avoid panic and avoid major shifts to your strategy. However, those with a bit of a financial cushion may want to explore, cautiously, the possibilities created by the market.
Though the US economy is strong according to recent data, the rest of the world is not so fortunate. US market pundits see this. The likes of Robert Shiller, Mohammed El Erian and Nouriel Rubini are predicting less favorable times ahead.
They may be right. We have been in a sweet spot for some time. “What to do?” is the perennial question.
Well, the first answer is “Not much.” This is consistent with my previous article entitled, “The Smart Investor Doesn't Panic When the Stock Market Drops.” Simply stick with asset allocation and have enough cash on hand for one to five years depending on age, job (stable or not), and retirement situation.
It is the second more explorative possibility that can be fun. Since the market is volatile, nibble a bit (provided you have your cushion should bad times come). This means as the market goes down (or if you think it has bottomed and is going up) take a small amount of your expendable money and invest it in high quality stocks, ETFs, or mutual funds that might benefit your portfolio long term. Leave the big bite for others. Though it is true that if you bet right you make more buying a bigger chuck, it is also correct that if you bet wrong, you lose more.
Investors, of course, dislike holding poor-performing stocks. Not only does it mean they make less when they sell. They are also less likely to unload it compounding the problem. In fact, investors are 50% more likely to sell a winning stock than a poor performer. It is postulated this is because this action is very personal forcing the investor to realize openly, “I made a mistake.” This puts a dent in ego structure.
The good news is that using the nibble approach makes you feel as though you are doing something. Still, your portfolio is safe because your number one priority is protection of what you already have. This method provides a winner from both directions.
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