Taking advantage of a volatile market

Previously in my blog post: Capturing Upsides , I explained that capturing upsides is essentially investing as early as possible and letting it grow.

That works in the long term in a growing economy. Today I will explain an advanced strategy which applies to short term in a volatile market. Volatile meaning a sideways trading market.

volatility

In a long term perspective, because of new babies born and because we use technology to make things faster and cheaper, the economy is always growing. This is the basic understanding which we have to come to first. (There are some who disagrees with this, in which case they would have 100% of their assets in Gold or pure unperishable commodities, because they believe the world only goes downhill from here.)

Once awhile, we can meet a condition where the market doesn’t rise or fall, but going sideways. In market terminology we call this a ‘choppy’ market or a ‘sideways trading’ market. This is the case where news and emotional sentiment influence the direction of the market more than economic data. A tweet by a president, a threat by boys playing with nukes or a response to tariffs can snowball into fear. The question is “How can we grow our money in such an environment?

Traders love this type of ‘sideways’ market because they can make/lose money easily when the difference in buying and selling price is big. However for an investor who doesn’t spend too much time buying and selling everyday, it can be frustrating because their money is not growing.

Usually, the advice is to hunker down and be disciplined:

A more advance strategy is to rebalance more often:

First check your understanding that rebalancing means selling high and buying low. In a sideways trading market, what happens is that there are a lot of fund flows between asset classes as people try to position themselves in response to news. When this repositioning and funds flowing happen, some overbuying and overselling can happen. Now look at the graph for this MSCI World Index.

sideways

Essentially population and productivity changes doesn’t happen overnight, it will take time for babies to grow up and machines to be installed. What happened here, in my opinion, are people reacting out of emotion and possibly overreacting. The sideways action might happen for a year or more too.

What we can do here is to rebalance more often, and to rebalance with large movements to take advantage of market overreaction. Not everyone should do this though as first you have to track the market movement, set a guideline for rebalancing action and then also make sure rebalancing doesn’t come with an excessive cost. An adviser-assisted platform would be an example of a way to do it. This also is something that we do not as the main (long term growth) strategy but more of a support strategy for the main one with limited time frame. Lastly of course, your investment portfolio should be suitably diversified that there are actually differences within your portfolio assets classes.

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