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Dear Fellow Investor,
Top Tips for Trading in an Excessively Volatile Market
Markets are on edge. Daily swings have investors rattled, and the headlines make it feel like panic is the only option. But in times of extreme volatility, the smartest move is often the opposite of what emotions tell you to do.
History shows us that market crashes, corrections, and recessions eventually give way to recoveries—and often powerful rallies. The key is having a game plan, keeping emotions in check, and focusing on strategies that position you for long-term success.
Here are six proven tips for trading in a highly volatile market:
Tip No. 1 – Don’t Panic – Stay Calm.
Easier said than done, I know.
But remember, markets are resilient. We’ve come back from far worse.
If you panic, you sell. And if you sell, you miss the potential for the recovery rally. We have to remember that markets are resilient and eventually recover, as they have historically. In fact, look back at the history of bad moves and you’ll see that each time they were followed by a recovery rally.
Tip No. 2 – Cash is King!
Cash is king.
Even billionaire Ray Dalio will tell you that.
For quite some time, he’d tell you cash is trash. However, he did a big U-turn.
“The facts have changed and I’ve changed my mind about cash as an asset: I no longer think cash is trash,” he said. “At existing interest rates and with the Fed shrinking the balance sheet, it is now about neutral—neither a very good or very bad deal. In other words, the short-term interest rate is now about right.”
Tip No. 3 – Take Some Advice from Warren Buffett
Legendary investor Warren Buffett, whose company Berkshire Hathaway outperformed markets for decades, has seen his fair share of recessions. He also has the experience many other investors may lack. For example, he has always advised investors to have a long-term outlook, because short-term volatility is typical. Better, just as we noted above, even the most painful recessions are temporary.
In fact, in a 2016 annual shareholder meeting, the billionaire suggested that dark clouds would fill the economic skies and they would briefly rain gold.
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted,” as quoted by MarketWatch.
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Tip No. 4 – Don’t Wait Too Long to Invest
It may not seem like a great time to invest. But if you wait too long, you’ll actually miss out.
As Warren Buffett has also said, “I haven't the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Plus, as he has famously said, “Be fearful when others are greedy, and be greedy when others are fearful.” Sure, there’s plenty of fear out there. But fear won’t last forever. Even the biggest companies in the world will have hiccups. Remember, volatility is scary—but it’s also when some of the best long-term opportunities appear.
Tip No. 5 – Get Paid to Wait for a Recovery
Companies with strong cash flows and attractive yields tend to outperform even the worst of markets. According to The Wall Street Journal:
“Dividend stocks have become the new darling on Wall Street, and investors looking for income are pouring billions of dollars into them. These securities are considered a good buffer during times of market volatility. They also are seen as an inflation hedge, considering that S&P 500 dividend growth has outpaced inflation since 2000.”
Plus, dividend stocks allow investors to profit in two ways: one, through potential appreciation of the stock price, and two, through dividend distributions. Many dividend paying companies also have a good amount of cash and hand, and are typically strong companies with good prospects for long-term growth.
Tip No. 6 – Buy Defensive Stocks
When the economy goes down the toilet, remember that millions of people still need to eat, brush their teeth, go to the doctor, use the bathroom, heat their homes, pay for utilities, and in some cases, buy alcohol to make the recession less stressful. That includes stocks like 3M, Colgate-Palmolive, Coca-Cola, Pepsi... the list goes on.
Bonus: Chart of Day
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One of the best ways to do that is by investing in passive income and growth, which investors can accomplish with Vanguard exchange-traded funds (ETFs). Not only do these ETFs offer a good deal of diversification, but they can also help lower your overall risk compared to investing in an average security.
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With an expense ratio of 0.05% and a quarterly dividend, the Vanguard Dividend Appreciation ETF (SYM: VIG) tracks the performance of the S&P U.S. Dividend Growers Index.
In addition, the VIG ETF has just over $109.6 billion in assets under management, a well-diversified portfolio of 337 stocks, and offers a low-cost, resilient, growth-oriented option for smart investors. Its biggest holding is in Broadcom, where the VIG ETF holds a 6.01% stake.
Some of its other holdings include Broadcom, Microsoft, JPMorgan, Apple, Visa, Eli Lilly, and Exxon Mobil, to name just a few. Making the VIG ETF even more attractive, it yields about 1.65% and paid out a dividend of just over 87 cents on July 2. Before that, it paid a dividend of over 93 cents on March 31. Its next dividend should be out by October.
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What techniques and tips do you rely on when markets turn volatile? Are there any specific sectors of the market you think are still on their way up right now? Hit "reply" to this email and let us know your thoughts!
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