Top 7 Strategies Long-Term Investors Should Know About Investing in Volatile Markets
Investors know that every investment comes with an element of risk (or at least, they should). But that doesn’t mean volatile markets aren’t downright scary even for those of us who are seasoned investors. After all, you’ve likely invested the majority of your life’s savings, and your investments are meant to provide for your future.
So with predictions of a recession in 2023 and markets currently in flux, you need a strategy to deal with what’s coming—whatever that may be. Stockpiling cash in a savings account is a dangerous move in an inflation-ridden economy. But you don’t want to risk losing your money to unpredictable stocks, either.
So what is a prudent investor like you to do?
Below, I’m sharing seven strategies long-term investors may want to consider when markets are in flux. Keep in mind that not every strategy may be right for you. Above all, the most important thing you can do during times of market volatility is to remain calm and stick to your long-term plan.
Predictions of a Recession on the Horizon
The Fed has made it clear that they will try to combat inflation by continuing to raise interest rates, even though they’ve acknowledged that raising rates will likely tip the economy into a recession. In fact, economists estimate that the odds of a recession in 2023 have jumped to about 65%, although opinions remain divided. This makes it the first time in history that a recession could be “self-inflicted” by the Fed in the interest of curbing inflation.
If we experience a recession this year, economists do expect it to be fairly mild because there are no balance sheet “shocks” in the economy that we know of. In comparison to past recessions, this one will be unique in that respect. For example, the Great Recession was triggered by a balance sheet shock in the housing market. Balance sheet shocks make recessions more severe and more difficult to recover from.
While any recession will necessarily be painful, this one may not be as painful as others we’ve experienced. If the Fed can successfully curb inflation, the recovery from this self-inflicted recession may be faster and stronger than recoveries in the past.
Unemployment and the labor shortage
The unemployment rate is projected to hit 4.7% this time next year, which would be the lowest unemployment rate for a recession ever. Interestingly, unemployment may not be a feature of this recession as it has been in previous recessions. There are almost twice the number of jobs available as there are people unemployed in the US right now, which means we’re experiencing a labor shortage rather than an unemployment crisis.
A labor shortage comes with its own complications. If businesses can’t hire workers, they may have to raise wages to attract the talent. And while this can be a good thing for workers, businesses will either have to raise prices to accommodate wage increases (exacerbating inflation) or tighten their margins. Smaller margins prevent businesses from reinvesting money into growth and expansion.
If they simply can’t find workers, businesses will likely have to slow production or reduce their service offerings. Plus, as the cost of borrowing money increases, businesses may not be able to invest in automation or robotics equipment that could help them maintain production as they struggle to find workers. Ultimately, the rising cost of money and the labor shortage are the two major factors working against business growth in 2023 and beyond.
What investors are worried about
As the powers above struggle to control economic turbulence, investors are worried about losing their money in the volatile markets. While yes, prices are low and you want to get in on the action while stocks are so steeply discounted, it’s impossible to know when the market will bottom out. (And with the predictions of a recession on the horizon, it’s likely that it hasn’t bottomed out just yet.)
But in these high-inflationary conditions, not investing can be just as risky as keeping your money in a turbulent market. It’s important to remember that risk isn’t just about the possibility of losing money in the markets. You take on risk when you don’t act either. This is because inflation all but guarantees your cash is going to lose purchasing power.
Every decision you make comes with risk—heck, even the choice not to make a decision comes with risk. Therefore, it is paramount to have a plan to deal with volatility in the markets and continue making sound investment decisions. Knowing your options, weighing the risks, and making well-informed moves is the best way to direct your future in the direction you desire.
A note about cash
Many investors are keeping their money liquid in cash reserves while they wait to see what the market does. Intuitively, most of us know this is not a good idea, especially as inflation continues to soar. The longer you keep your money in cash, the faster it loses purchasing power!
But I also understand that emotions are simply impossible to separate from investing decisions. So if you must keep a portion of your dollars in cash to help you sleep at night, keep them in high-interest-bearing accounts. As interest rates rise, so do rates on savings and money market accounts. You may as well benefit in whatever ways you can.
Top 7 Strategies for Investing in Volatile Markets
While no one likes to make investing decisions during times of market volatility, failing to act is not a good idea. Even if “acting” means simply revisiting your plan and reassuring yourself that you’re still comfortable with your strategies, this is much better than moving forward with blinders on.
Below are seven strategies long-term investors may want to consider to stay on track during volatile markets:
Resist the urge to sell
Focus on the long game
Consider moving money based on your upcoming expenses
Adjust your trading habits to suit volatile markets
Practice active investing
Invest in alternative assets
Play to your strengths
1. Resist the urge to sell
Losses in the markets aren’t typically permanent. The markets are in flux—they haven’t taken an irreversible nosedive. But when you sell at the bottom, you cement your losses. You have to reenter the market to earn back the gains. You might as well stay in rather than risk losing out on the most significant growth.
Of course, this doesn’t mean you shouldn’t jump off a train that’s destined to go off a cliff. But rather than listening to the noise and panic of others, keep as calm as possible during times of market volatility.
2. Focus on the long game
Even for those of us who have lived through more than one recession, economic downturns and volatile markets can be scary. But I urge you to think back to your investing strategy during the last recession you experienced (probably the Great Recession).
Did you hold your investments through the hard times and enjoy the immense growth when the markets eventually recovered?
Or did you sell in a panic and miss out on the subsequent gains?
Thinking back on how you reacted to the last recession may give you some clarity about what to do during this recession. If you sold investments at a loss and reentered the market too late, you know not to do that again. If holding your investments paid off, remember that strategy. Holding your investments through an upcoming recession may pay off again.
3. Consider moving money based on your upcoming expenses
If you’re retired or will soon be retired, now may be a good time to hold a preset amount of your future income needs in cash or bonds if you can. Ensuring you have 8-12 months of future income available may help you prevent having to sell investments at a loss when you need the cash.
Likewise, reexamining your asset allocation during times of volatility may illuminate imbalances in your portfolio you hadn’t realized were there. Changes in the market have probably shifted your target allocation. Assets that have gained in value now represent a larger portion of your portfolio, while assets that have decreased represent a smaller portion. Now is a good time to rebalance as necessary.
Keep in mind that rising interest rates mean returns on bonds will likely be higher in the near future. Those in retirement or close to retirement have probably already shifted their asset allocations to be more bond-heavy, so they may enjoy higher returns from those investments than they otherwise would have.
4. Adjust your trading habits to suit volatile markets
While it may be better to delay major trading decisions until market volatility has cooled, sometimes you don’t have a choice. If you must trade during market volatility, keep in mind that the most volatile times of day are at market open and market close. Avoid trading at these times if possible. Additionally, you may consider using a trading strategy called “scaling”, which means you trade small numbers of shares at different times throughout the day to balance out pricing fluctuations.
5. Practice active investing
Active investing isn’t right for everyone, especially for investors who don’t have the skills or patience to spend a significant amount of time researching and assessing different investments—not to mention factoring in major national and geopolitical events.
But if active investing is a part of your strategy and you have experience actively investing, you have options during times of volatility.
One such option is hedging against volatility, which means your strategy includes plans to sell certain investments if prices fall by a certain amount. You can even set stop-loss orders to automatically sell shares if they crash to a number you’re not comfortable with.
Of course, hedging against volatility can trigger tax events that may outweigh the benefits of selling. Additionally, this strategy may prevent you from reaping the rewards if and when prices rebound. For these reasons, hedging against volatility isn’t typically ideal for most buy-and-hold investors, at least for the majority of their holdings.
Another option is to take advantage of current market conditions and invest in volatility itself. ETFs and ETNs that track a volatility index actually increase in value when volatility increases. One such index, the VIX, tracks the volatility of the S&P 500 index. However, these indices are not meant to be long-term investments. They are only beneficial during times of volatility.
6. Invest in alternative assets
Today’s investors have so many investment options in front of them. From real estate to precious metals, from private equity to equipment leasing, you’re by no means restricted to stocks and bonds. So if you need to take a break from the stock market, consider turning your sights to self-directed investing.
Many asset classes available to self-directed investors act as natural hedges against volatility in the stock market. For example, real estate, while not immune to risk and volatility, is historically much less volatile than the stock market. After all, people will always need a place to live.
In fact, certain types of real estate investing may be poised to do particularly well given the behavior of certain economic indicators. Consider the following scenario.
Interest rates are rising, so fewer people are able to afford mortgage payments. Adult children may be stuck living with their parents. Young couples who are growing their families may be putting off a move into a larger home to accommodate more children. Elderly parents may be taking over their children’s guest bedrooms permanently.
All these scenarios mean that household sizes are growing, but the houses themselves are not. Until the housing market becomes more affordable, people will need a place to put all their stuff. Enter self-storage facilities. If interest rates continue to rise and housing prices remain high, self-storage investors may significantly benefit from some of the effects of the current economic climate.
7. Play to your strengths
Investing in volatile markets isn’t comfortable for most people, but the important thing to remember is that you should play to your strengths. This is the beauty of self-directed investing.
Instead of being restricted to stocks and bonds that you have no control over, self-directed investing gives you the power to invest in assets that you believe will perform well based on the signs you’re reading in the economy. Visit my website to learn more about all the assets available to your portfolio as a self-directed investor.
How We Help Investors Self-Direct Their Future
At Chicago Trust Administration Services, we’ve seen our fair share of recessions. We were with you through the Great Recession, and we’ll be with you through this one. If you believe your investment strategy could benefit from a heavier emphasis on self-directed investing, give me a call.
I’ve been helping investors take advantage of more than 30 asset classes to hedge against inflation, create reliable income streams for retirement, and self-direct their investments for a future they can feel more secure about.
To learn more, I invite you to schedule a complimentary meeting with me by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.