How to Trade When the Markets Go Sideways
Wall Street loves volatility – the more chaos, the more opportunities for profit. It’s relatively easy to turn a profit when the market is going up and just as easy when the markets are going down. It’s when volatility dries up and markets trade in a holding pattern that investors see drops in returns. It can often lead to making high risk moves that result in big losses when volatility returns.
But just because the markets aren’t moving doesn’t mean there aren’t moves you can make to keep your portfolio returns up. While high volatility might make it easier to buy and sell stocks, there are other investment strategies you can employ to avoid stagnation. Why let just the bulls and bears make all the money?
One way investors can take advantage of markets that are treading water is to buy dividend paying stocks. Not only will it help mitigate your downside risk, it also boosts returns through quarterly dividend payments. While dividend stocks are primarily thought of as conservative investments, investors can use them to increase their overall portfolio returns when growth is hard to come by.
MLPs in particular are good alternative options when the markets aren’t doing much. They typically offer higher dividend yields than you might find in stocks with more consistency. Many offers yield in excess of 5 percent, which means even limited growth of just 5 percent would result in a 10 percent overall annual gain.
Options are another great way to take advantage of stagnant markets. Many strategies allow investors to make money as long as the underlying stock doesn’t go up or down by a specified amount. It also allows investors to leverage their money and mitigate risk.
One of the most common option strategies known as a covered call can be a good way to increase your returns as well. By selling a call at a higher price on a stock you own, you can immediately earn a profit. It also provides some downside protection if the stock dips at the cost of limiting your total upside potential.
Find the Niche that Works
Underneath the seemingly calm surface waters of neutral markets, there are often raging currents taking place unseen by investors who aren’t looking for them. There’s always a bull market happening somewhere. Even when it seems as if the broader indexes aren’t experiencing much activity, there can be certain sectors or asset classes that are.
Macroeconomic events can create opportunities that won’t affect the market as a whole. For example, a biotech company could be experiencing gains due to a new drug they’ve developed or a commodity like gold or silver may be rising in value for a number of various reasons.
It’s important to keep diversification in mind when designing a portfolio for sideways markets. Investing heavily in dividend paying stocks might seem like a good, conservative way to generate a steady stream of income and boost your portfolio returns, but they’ll under-perform in a bull market when growth stock outpace income stocks. Regardless of how the market is performing, there’s always a strategy available for investors to make a profit.