In the past month, the S&P 500 declined 8.8%. We’ve all enjoyed a nine-year bull market but that’s no reason to be careless with your money. There are a whole host of macroeconomic issues in play; however, we won’t go into those right now. Instead, we’re going to touch on at a high level, a few strategies to manage your money in this volatile market.
We usually dollar cost average into positions. This involves buying a fixed amount of money in an asset at a constant time interval. For example, let’s assume you buy the Vanguard Total Stock Market ETF (VTI) and you have $2,500 to invest each month. On the first of each month, you would buy $2,500 worth of VTI, ignoring the price. Over time, you would end up purchasing more shares when prices are low and fewer shares when prices are high.
Sometimes, we move away from dollar cost averaging. Take a look at this chart from Yahoo Finance.
Imagine if you were able to take sell out of your positions when extreme downward movements occurred and buy back into the market after reversals occurred. You’d be better off than dollar-cost averaging alone. Let’s look at a few ways to take advantage of significant market movements.
The easiest thing to do is to pick a price you’d sell at and enter in an order that executes when a security hits that price. For us, we look at the 200-day moving average and use that as our floor. When security prices move below that level, sell some, if not all, of your positions. Since the moving average is dynamic, I watch and adjust it often.
Last week’s volatility blew through the 200-day moving average on a few of our securities. The steep declines set off some automatic sells and I put in a few manual ones as well. Because of work required holding periods and where our assets are located, I was only able to translate about 50% of our assets to cash. We’re going to be cautious about putting the money back to work in 4Q 2018.
Buying Broad-Based Index Puts
Think of this like buying insurance on your car. If something bad happens, you get “paid”.
One of the safer options strategies is buying broad-based index puts. For example, you can buy puts on the S&P 500 Index ETF (VOO), which would allow you to receive a cash payment if the S&P 500 falls below a certain value within a certain time period. This will cost you money and lower your returns in good times, but you’ll sleep better at night when the market goes south.
I didn’t realize before I had a conversation with my compliance department that I could buy options on ETFs. We’ll be buying these “insurance policies” in the future.
Rebalance is one of the easiest things to do in your portfolio. Usually, this is annually or semi-annually and it takes the thinking out of trying to time the market. Sure, you’ll probably miss optimal buying and selling points, but academic data has proven that rebalancing provides greater returns than a simple buy and hold strategy.
Let’s say you target a 70%/30% Equity/Bond mix. At the interval you select, sell and buy funds to re-establish your 70%/30% mix. The result of this is buying low and selling high.
How are you managing your money now?
Disclaimer: These opinions are strictly mine and should not be considered investment advice.