Don’t Panic! Turn an Unstable Environment Into Maximum Profits
Now that the election is over, investors have begun turning from hopeful optimism to nervous skepticism. The Trump administration was viewed as good for American manufacturing and investors began to buy industrials and materials, while commodity prices in metals like copper enjoyed similar gains. With the actions of the administration early in office, though, investors are beginning to feel a sense of fear.
But fear has never resulted in profit. Smart investors know that high volatility just means more trading opportunities. Instead of panicked trading moves, some investors do the opposite and pull their money out of the markets completely. This can lead to missing out on later gains and under-performing the broader indexes.
But there are more than just two moves investors can make. There’s always a bull market somewhere – not all assets perform equally at the same time.
Play the Fear Trade
When volatility rises and uncertainty becomes the primary factor when determining investment choices, safe haven assets like gold often perform well. Increasing your holdings in gold can be accomplished either through direct gold commodity purchases or gold mining stocks. Silver also falls into this category and actually experiences larger swings in returns, although its performance lags behind gold. When gold prices start moving up, silver won’t be far behind.
Investing in conservative stocks is another way to mitigate risks without sacrificing returns. High-yield dividend payers provide investors with protection from downside movements and do well when the markets trade erratically. They also boost returns when markets are going up, so you don’t miss out on any upside movements, either.
Conservative sectors like healthcare, consumer staples and utilities are good places to invest during uncertain times, as well. These stocks tend to be inversely correlated with the broader indexes and outperform when other sectors are falling. Energy MLP’s and REIT’s can provide investors with protection, too.
Finally, options are a great way to play the market when you’re unsure of its direction. There’s plenty of strategies that allow you to profit from either upside or downside movements through calls and puts. As long as the stock moves out of a certain trading range, you’ll earn a profit.
You can also use options to hedge your current positions. One of the most common, a covered call, will net you upfront gains by selling a call at a higher price on a stock you currently own. You’ll miss out on any upsides above that strike price, but you also hedge your portfolio from downside movements.
While panic almost always leads to poor decision making and negative returns, there’s nothing wrong with hedging your portfolio against new risks. If you have profits in a trade, it might be a smart idea to take your original investment off the table and play with the house’s money. You’re guaranteed to at least break even in the worst case scenario, while still leaving yourself open to more profits.