Nobody was expecting 2016 to start this way. Markets are down big and don’t show signs of rebounding any time soon. Investors believe that although there will be some short-term bounces, this correction mode that world markets are stuck in is probably here to stay for quite a while.
But what should the individual investor do during times of market pullback?
The reason you have auto insurance is to protect you financially if something happens to your vehicle. Homeowners and health insurance do the same thing. Hedging is an insurance policy in the investing world although you don’t purchase a policy like you do outside of Wall Street. You could buy put options, sell covered calls, or short-sell—anything that goes up when something else goes down can act as a hedge.
The more of these types of positions you put on, the more hedged you are. Professionals adjust their allocation of hedging to match market conditions.
But be careful. Don’t try to speculate with hedging trades. Use them only to protect yourself. Many are highly volatile and can result in big losses if you use them the wrong way.
You need some boring stocks. You know, those stocks that barely move regardless of how good or bad the market gets. Healthcare, utilities, and some other really big companies. Investors measure volatility by looking at a stock’s beta. The higher the beta, the more volatile or moody a stock is. Technology and biotech stocks are considered high-beta stocks.
There’s no rule that says you have to invest. If the market looks bad and you don’t know what to do, just do nothing. You won’t make money holding cash but once the market goes down so much that your favorite names are selling at a discount, take that cash and put it to work.
Stick with the Index
Some of the richest investors in the world advocate investing only in indexes rather than trying to pick individual stocks that will beat the market. That doesn’t mean that you won’t lose value when the market goes down—you will but as long as you don’t sell at the lows, you will ride the wave back up too.
Increase Your Time Horizon
If you’re a long term investor, short-term market moves don’t mean anything to you. You simply stay the course and when stocks are on sale, you buy more. If you’re trying to time volatile market, you’re probably going to lose. Even professional traders have problems navigating markets that are heading lower.