We’re in a period of high market volatility and you may feel helpless to do anything but watch your hard earned portfolio decrease in value.
Although you might feel a high level of fear about entering the market with new funds, if you’re sitting on cash inflation may be working against you. Instead, there are two techniques that may provide you with a sense of control: “Build a Ladder” and “Buy the Dip.”
BUILD A LADDER
Sitting on the sidelines can be a costly mistake. First, inflation erodes the buying power of cash. With eight percent year over year inflation, that buying power is eroding at a faster rate than ever. Consider building a ladder of fixed income securities that includes short term Treasuries, Corporate Bonds and Bank Certificates of Deposit. Yields on short term treasuries are now over three percent and are considered to be the safest investment available (backed by the full faith and credit of the United States). Divide your funds into four tranches that will have four different maturity dates. For example, 90 days, 180 days, 270 days and finally one year. Every ninety days you will have one fourth of your money become available to reinvest into the ladder or deploy into some other investment.
BUY THE DIP (AKA “A Reversal Strategy”)
Studies have shown that market timing does not work on a long-term consistent basis. In other words, the ability to buy stocks at the lowest price point and then sell at the highest price point and do it on a consistent basis just doesn’t work. Modern Portfolio Theory developed in the 1980’s concludes that investors would do better by allocating their assets across a wide array of investments and let the market performance come to you. While this investment strategy is the backbone for most long-term investors, there’s another strategy called “Buy the Dip” that also has merit. According to research findings by Quantamental Research in March 2018, they conclude that, “A strategy of investing in securities that fell more than 10% relative to the broader market index, during a single day, significantly outperforms the index between 2002 and 2017 in the subsequent periods”. Click here for the link to the research.
Down markets and high market volatility is upsetting to most investors, however, you can take some control by taking advantage of the two strategies above. Please call or email me with your questions and comments.
