How To Invest Money In Volatile Markets

Posted on July 19, 2013 at 2:20 PM PDT by


The reason why is market timing risk. People like to think that they can invest at “just the right moment” and somehow avoid buying the high point of any given market. But that’s a ridiculous standard and effectively impossible.

how to invest money

You can, of course, look back to 2007 and say, “Well, I’m glad I didn’t put my money in at the top!” And that would be true. But it would also be true that you might easily have missed the opportunity to get in during the low five years before that.

Could you have correctly guessed how to invest money in 2000? If so, congratulations. Thousands of highly paid money managers completely missed the coming dot-com crash.

Double-edged sword

That’s the double-edged sword of market timing. You can avoid the worst of the market crashes by staying in cash, but you also will miss, completely, the recoveries that follow. And all the dividends and fixed-income payments between. Meanwhile, inflation eats away at your cash.

The best money managers in the world instead aim for what’s called “risk-adjusted return.” That is, they target a portfolio return of, let’s say, 7% a year, and then seek ways to get that return as consistently as possible with a minimum of volatility.

If bonds paid 7%, all of the money managers in the world could retire. But bonds don’t pay anywhere near that, and inflation is a constant. So, some risk is necessary.

Meanwhile, volatility — how much a given asset moves up and down in value — can be your friend. For instance, if you have time to wait and can ignore your portfolio’s day-to-day value, volatility can give you a means to programmatically sell high and buy low, through rebalancing.

Market movements

But that strategy only works if you are invested in the first place. By holding a broad selection of stocks, bonds, commodities and real estate, the prudent investor is able to “ride up” market movements in each investment type as they happen.

What becomes crucial is not “if” one should invest or even “when” but staying invested, whatever the cycle, and using the movements of the markets to your advantage.

That’s how the big pension fund and university endowments do it, by targeting a return that allows the power of compounding to work then adjusting volatility to a desired minimum.

Investing in volatile markets doesn’t require a crystal ball, insider information or nerves of steel. It just takes the will to decide on a solid, actionable investment plan, then follow through.