Over this current 10-day period, October 28 through November 8, over 55% of S&P 500 stocks report quarterly earnings.
The U.S. Presidential Election is this Tuesday, November 5. This is a once every four years event that could lead to very sharp sector rotations, in either direction, based on the outcome.
The Federal Open Market Committee (FOMC) announces meets this week and is expected to cut rates by 25-baisis points on Thursday.
Any one of these events can lead to wide, volatile trading ranges. All of them in a week of each other can lead to multiple price swings.
I am going to share with you 10 of my best strategies to manage volatility and the emotions that go along with it.
1/ Build volatility into your daily expectations.
Stocks and the stock market offer above average longer-term returns. The counter side of the equation is that stocks are usually much more volatile than fixed return investments.
Volatility is the price we pay to invest.
Novice investors and traders often only focus on the upside potential.
Professional focus on both the potential reward and the potential risk.
Any time we make an investment, we assume a risk that it may not be profitable. Nobody has a 100% success rate.
On average, the S&P 500 index closes higher on 53.6% of the day and lower on 46.4% of the days. Essentially one of every two days is expected to closer lower in the market. Expect down days.
2/ Know your timeframe.
The longer your timeframe is, the less important daily volatility or intra-day volatility should be.
Stocks can trade in wide daily ranges from one day to the next. Build this into your expectations.
Day traders need to pay attention to every tick, every day.
Intermediate to longer term holders 3-6 months or longer, need to pay more attention to the overall trend.
3/ Have a risk-budget for every position and your overall portfolio.
If you are planning a vacation, or a new car or home, one of the first steps is to set a budget, so that you don’t get overextended. Stock market positions are the same.
When taking a new position, decide how much capital you want to allocate to it.
Also, you need to build in an expectation that your investment might not be successful.
If it is not, how much money are you willing to risk, before you accept that your timing was off, and you need to close it out.
Set stop loses. Determine at what price you have to accept that your timing was off, and you need to close the position.
Assume that any new position that you take will NOT be successful and that it WILL be stopped out.
The importance of accepting the risk at the buy is to prevent you from making an emotional decision to keep holding a bad position, or worse, add to it.
4/ Know when to trade big, trade small, or not at all.
In front of potential high volatility events, I try to limit my new buying activity.
Buying ahead of major events to lead to sharp price moves in either direction.
If I really want to take a position, I will often start it with half sizing.
5/ Raise more cash.
The best true volatility hedge or more cash and less exposure. The are other hedging strategies that can work, but many of them are more complex and timing intensive than you might be able to excel at.
More positions can add more potential volatility. Cash has no volatility and is the true best hedge.
6/ Scale in and out of positions.
One of my favorite position management tools is the ability to scale in and out of positions, gradually, instead of all at once.
If I see a high potential upside idea, but the chart or market might be more volatile than average, I will often start with a 2-3% position instead of a full 3-5% position.
A smaller position that gets you involved is often better than no position. It can be added to at any time.
If I have a winner that I want to book gains in, but still stay long, selling 10-20% of the position lets me lock in gains but still stay long in an uptrend, for possibly a bigger long-term winner.
If I am in a position that is underperforming or is down, I might reduce it to dial back some of the risk.
7/ Be patient.
Don’t be in a hurry to always do something, every day.
It’s not sunny at the beach every day of the year. There are many times it is ok to sit and watch and just let open positions work.
Good positions and big winners often take time to develop. Let positions work.
8/ Hedging.
Basic hedging ideas include a basic index short in inverse index ETF. Index put options can be slightly more complicated and timing intensive.
A volatility linked ETF that goes up in value when market volatility rises is an alternative as well.
To hedge or not is an individual call and there are pros and cons to each.
9/ Embrace volatility and seek to capitalize on it.
Volatility related pullbacks can lead to lower buy prices in new ideas.
Instead of fearing volatility, accept it as a daily function of markets and look to capitalize on it.
Market or stock pullbacks often gave you an opportunity to get a position is a favorite idea that you have missed so far.
Keep a high-quality, narrow watch list and be ready to act.