Investing during a volatile market is not for the faint of heart. Some days there will be wild swings up and other days there will be wild swings down. News will come out that you think will drive a stock or stocks higher and instead the exact opposite will happen. A Morningstar study found that investors had better returns during times of less volatility, but if you want to keep investing in 2020 you’ll have to accept you’ll be investing during volatility. How should you invest during times of volatility? Accumulate extra cash to invest, stick with what you know, don’t try to time the market and leverage financial resources.
Accumulate Extra Cash To Invest
To invest in a volatile market, you need to have money to invest. Don’t sell investments for the sole purpose of getting cash to invest in another stock. Continue to stick to your investment plan (assessing rebalancing if needed), and look for other ways to generate more cash. This could be cutting back on spending in the short term, starting a side hustle to generate a little extra cash or looking for ways to advance your career and get a raise. COVID-19 has made it harder in the short term to generate extra cash so your best bet is cutting back spending as much as possible.
Don’t “spend” too much cash buying stocks though. And, definitely don’t empty your emergency fund. You should always have an emergency fund on hand in case something comes up. Especially with the recent events we are already seeing businesses temporarily shutter and uncertain economic times. Your paycheck may not be as guaranteed as you thought back in January. You don’t want to find yourself in a situation where you’re short on cash and have to sell stock.
Stick To Investments You Know
Don’t be a long term investor turned day trader in volatile markets. It can be alluring to identify a stock that you think is beaten down and will pop. But if that doesn’t happen you now have a stock you likely wouldn’t have bought otherwise for the long term or you have to sell it in the short term for a loss. Even then, there is no guarantee you’ll make money off it in the short term.
I bought Bank of America stock back in 2010 thinking that the stock was way down and it had to pop. I ended up losing money when I finally sold it a few years later! What I should have done was added to my position in Apple. I was very familiar with Apple and felt confident in the long term it would continue to rise. Buy the stocks you’ve always valued and wanted to own but were too expensive for you to buy before.
If you don’t know anything about stocks and are now interested in buying stocks here are a few things to get you started. You inevitably will lose money on a few of your positions and feel like you bought or sold at least one of your stock positions at the wrong time. That happens to everyone and is completely normal. Like everything you need to start somewhere and you’ll learn as you go. Don’t put all of your eggs in one basket. Buy ETFs which track the market and hold a variety of stocks which help you diversify. Or, buy a little bit of multiple stocks that you like. It’s important to diversify your portfolio, no matter how small it is.
Find a friend you trust that invests in stocks already and ask to pick their brain. If they tell you about a stock they like and have made a bunch of money on be cautious though. They bought that stock at a different time and it’s always possible a stock that has done well recently may not do well moving forward.
Consider Buying Dividend Stocks
There is no guarantee that the underlying stock will rise in value but you’re at least getting a cash flow in uncertain times by investing in dividend stocks. Can companies stop paying dividends? Yes, companies can stop or reduce their dividend payments to shareholders. Market conditions may result in temporarily dividend reductions or eliminating them all together. At this point we don’t know what the economic repercussions will be for the recent events but seeing that cities are announcing temporary lockdowns and the travel restrictions you should expect there is some risk to dividend payments. If that makes you uneasy before you buy a dividend stock check to see how much cash the corporation has. This is from November 2019, but at the time CNBC reported that Microsoft, Berkshire Hathaway, Alphabet and Apple all had more than $100 billion of cash. Both Microsoft and Apple are dividend stocks.
When Should You Buy Stocks
Charles Schwab compared the returns of a disciplined investor that sat tight and stayed the course no matter how the market performed, a reactive investor that pulled their money out in 2008 and kept it out and a waffler investor that would move money out during negative returns and add money in during years of positive returns. Not surprisingly the disciplined investor made the most money.
Be a disciplined investor by setting aside a little money from each paycheck to invest and continuously investing that money. Stay the course and don’t let the daily, weekly or monthly swings phase you. If you see a stock crater one day and you want to invest more that day absolutely go ahead and buy it. But, don’t then try to time the pop and sell it at a near term high. If that doesn’t sway you, don’t forget, the taxes on long term capital gains are much better than the taxes on short term capital gains.
One example of when I did this personally was when I started buying Zoom ($ZM). I started buying Zoom at $89.17 a share on June 24, 2019. It jumped to $97.18 on July 18, 2019 and I bought more. The stock then went down all the way to $64.05 on December 6, 2019. It was hard to buy a stock continually declining, but I continued to buy all the way down to $64 because I believed in the company. I could never have predicted the recent events and in retrospect I should have bought more in December! You could say I got lucky buying in December, but I felt very unlucky from July to January.
Financial Resources To Leverage
The media writes clickbait titles. They are meant to sound the alarm and get you to click the title. I browse CNN Money, CNBC but I base most of my investing decisions on other pieces of information. For stocks I’m interested in, I closely follow the earnings announcements and 10-Ks filed. I use the stock app on my phone and add all the stocks I currently own and potentially want to own to the watch list. That way, I can see how the stock is trending, EPS, P/E ratio and dividend yield all in one place. When I want to see more information and see how the stock has trended I usually go onto my laptop and leverage Yahoo Finance.
These last few weeks the market has had wild swings and has been very volatile. Have you changed your investment strategy and if so, how?