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I would like to start by saying, I am in no way predicting that the 2016 market will be a volatile environment similar to what we have experienced throughout 2015. If you believe however that the 2016 market will mirror the volatility of 2015, then this article will provide strategies for investing in times of uncertainty.
Dollar Cost Average
According to the 2015 Market Perceptions Study from Allianz Life, 37% of people with extra cash said that “fear of market uncertainty” would prevent them from investing today. This is slightly lower than the 40% that expressed this same concern in 2014, but it remains the top reason for keeping them out of the market. This is followed ironically by “lack of reliable financial guidance” at 23%.
Well reliable or not, (you decide), here’s some financial guidance for the 37% with extra cash – Dollar Cost Average! Quite simply, instead of taking all available cash on hand and investing it all at once, choose to invest it in equal increments over time.
"For example, the nervous investor with 12k in cash today, may not want to invest it all into the market at once. Instead, break it up into equal increments and invest over a time period you feel comfortable with. In this scenario, investing 1k a month for all 12 months of 2016 would allow you to dollar cost average." - A featured quote on TheStreet.com
This prevents you from putting all your eggs into one basket, or in this case, all in one day. In a volatile environment, that particular day you decided to go all in, may be the worst possible day to invest. By spreading that same investment over 12 months you create an average cost basis for your investment. The idea being that some months the market will be up and some months the market will be down. But by investing consistently and equally, you will create an average price over time.
My biggest advice for dollar cost averaging is do not try to time the market! Take the money that you are planning on investing and divide it into equal increments over a time period that you are comfortable with.
If you stick to this method all the way through, it will help eliminate the “emotion” from your investing. - A featured quote on TheStreet.com
Upgrade your portfolio
Use times of volatility to upgrade your portfolio. The idea here is that you currently own Company A. Let’s assume that Company A is in the Technology sector. Due to a hypothetically volatile environment, Company A has come down 5%. This is an opportunity to potentially upgrade your portfolio, assuming that we are in a volatile market and not a bear market. (Volatile basically meaning, that we assume the market will go back up at some point and not continue to trend downward for extended periods of time).
In order to “upgrade” your portfolio and not “change” your portfolio’s overall allocation - we want to find a “Company B” in the same technology sector. Company B will ideally be a company in the same sector that you feel is a better quality company.
Let’s assume now that Company B has depreciated the same 5% in value as Company A. The thought process will be that assuming the market goes back up, that Company B will be able to either recover faster or better. In this scenario Company B will ideally recover the loss of 5% faster than Company A or go up more say 8%.
The alternative is that both Company A and B both go back up 5% in an equal time frame. Well, if Company B is truly a better “quality” company than Company A, you have recovered the same initial loss but now own a higher quality company in its place. This is still an upgrade! - A featured quote on TheStreet.com.
I have described these two strategies in their most basic form, but hopefully you can apply these methods to your individual situation. If you would like me to expand on how these strategies may fit your individual needs please feel free to contact me.
Raymond James Financial Services, Inc.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any opinions are those of Joseph Carpenito and not necessarily those of Raymond James. Examples discussed are hypothetical in nature and are not intended to reflect the actual performance of any particular security. Dollar cost averaging does note ensure a profit or guarantee against loss.