While we are coping with Covid-19, it is hard not to notice the extreme volatility of the stock market. A series of black swan events in early March 2020 resulted in the largest market plunge since Black Monday 1987. Yet a few weeks later, we witnessed the biggest single day gain of the Dow. Nobody can foretell the future but what is guaranteed, is that markets will remain volatile. In this issue, we explore two approaches to take advantage of market volatility.
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How markets behave has a strong correlation with the expected Covid-19 situation. Australia, New Zealand and South Korea, have started to wind down their lockdown measures, while Europe and the USA are still in the midst of the battle.
The global economy is now at Point 1. It is unlikely that it takes off (V) as experts are saying that the pandemic would be a long drawn out one. We can only hope that we’ll experience a U-shaped recovery instead of L. Regardless, here are two strategies that we can put in place to take advantage of the ups and dips.
Dollar-Cost Averaging
This entails investing the same amount on a regular basis, and not timing the market. In the above illustration, the same $8,000 invested over the same seven months, yields 4.07% when invested in regular sums of $1,000 monthly. This is one way to smooth out the ups and downs of the market.
Regular Fund Rebalancing
This method buys into stocks when it’s relatively cheaper and sells of stocks to buy bonds (take profit) when stocks rise. For example: Original portfolio of 30% bonds and 70% stocks. Stocks go up, we sell (sell high) to take profit and buy bonds, rebalancing back to 30% bonds 70% stocks. When the market drops, we sell bonds to buy stocks that are now relatively cheaper (buy low). In this way we buy low and sell high without having to time the market. Some instruments allow us to do this automatically.
Of course there are numerous ways to profit from a volatile market. These are but two simple strategies. More importantly is to know your investment objective and volatility tolerance. Speak to us to find out more or to just have a chat on options available.
