If you’re not frustrated with the markets by now, you must be taking better medication than I am (ha ha). Bloomberg TV, one of the largest investment reporting firms in the world, described 2015 as “the year that nothing worked.” The point? All types of money-making strategies – active strategies, passive strategies, alternative strategies – struggled to work in 2015. All seemed to post negative returns in a year that the markets ended fairly flat. Asset allocation funds, which focus on having a very well diversified portfolio, had the worst year for returns vs. their index since 1937 (Bloomberg.com).
The markets started 2016 with the worst first week of returns in the history of our stock market. That week brought investors a -5.9% rate of return. The collapse of the Chinese stock market is causing great concern over their dramatically slowing economy and shaky currency devaluation policy. On September 10, 2015 David Tepper, the billionaire hedge fund manager, was quoted on CNBC saying, “There is a time to make money in the market, and there is a time to not lose money in the market … and we are entering into a period of trying to not lose money.” When he made this statement, the S&P500 Index, a measurement of the stock market (Bigcharts.com) closed at 1,952. It then managed to go straight back up toward its highs by the beginning of November.
We believe that 2016 is going to be a year of extreme market volatility. Based on geo-political events in the Middle East, rising interest rates here in the U.S. and a weakening Chinese economy, we are advising investors to meet with their financial advisors to set up a defined game plan designed around specific individual risk parameters. It has been said that to make money in the stock market, you have to buy low and sell high. Putting that concept into practice means that you must actually be active in your money management. To buy low, you have to have already sold high, or have a substantial amount in cash. The type of volatility that we see coming in the year ahead could create tremendous opportunity for the investor willing to embrace such volatility and let the market trends work for instead of against him.
Those investors who are systematically saving into their 401K, 403b, or other retirement plan should seize the potential opportunities of a volatile market. The market’s ups and downs will allow for people who invest every two weeks or every month the ability to buy more shares as their deposits go in. The next time the market surges to all-time highs, they will have more shares than they ever had in the past, bought at a much lower level. This strategy is known as Dollar Cost Averaging, and is an option you may want to consider.
Volatility may create opportunity; but capitalizing on it requires advance preparation, an understanding that things will be rocky, and a willingness to set realistic long-term expectations – knowing that putting money to work in a down market could bring possible reward for taking advantage of the circumstances.
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Investment advisory services offered through SPC, a registered investment advisor.
OLV Investment Group is independent of Sigma Financial Corporation and SPC.