Some of the questions I get asked most frequently lately is: “Who is selling out of this market?” or “Why is there so much volatility?”
Investors today are nervous and frustrated with the returns they have been making in their portfolios. Individuals have watched their good quality “blue chip” investments rise and then sell off many times over the last few years — showing no positive returns during that time.
Who is responsible for these dramatic swings in the market (which have assisted in keeping portfolios from rising) and how can investors navigate around them?
As I've written previously, volatility is here to stay. I believe that new mechanisms for processing transactions are partially to blame for it.
More and more trades each year are being placed by computers. The software models that are used in many cases have the ability to execute large transactions in less than a second. In many instances, when an investor is bidding to buy a stock, the person on the other side of the trade is actually not another investor but a computer — a computer that has the ability to buy or sell based on a model.
Many of these software models revolve around technical analysis. Once a technical level is breached to the up or downside, this triggers a cascade of trades that can take the overall market up or down significantly in a short period of time. There's your volatility!
Most investors that follow some form of technical analysis know what these crucial levels are and therefore many trades are placed around these prices, furthering the volatility.
In my opinion, we have more traders today than ever before (flash traders, high frequency traders, hedge fund traders). I believe these are the individuals that can move markets. They are possibly trading millions of shares in less than a second which can definitely move the over stock index up or down.
Investors believe that because the market has fallen over the last 6 weeks, it is the individual investor that has sold out. This is how things have worked for years. However, in speaking with colleagues, I can honestly say that most retail investors (average investor on the street) have not and do not sell out when times get a little rough. Many of them buy more or average down to take advantage of the opportunity. I believe that it is these traders who are causing the market volatility, and it's retail investors who feel like they need to panic and sell.
So if we, as retail investors, are at the mercy of these traders at times, what can we do to make money? I believe that in order to make money in this environment, an investor has to first and foremost remain patient. Individuals must not panic if the market falls during a four- or six-week period. These are known as corrections and they happen regularly over time — they are a healthy occurrence during a “bull market” (positive market).
Investors should also remain diversified. You should not be invested all in gold, all real estate, or any other sector. Have a balanced portfolio.
Lastly, if you have a longer term horizon, use pullbacks as opportunity and put more money to work instead of getting out of the market. If your time horizon is short, then perhaps you should look at investments in the fixed income area for security.
These ideas are nothing new, but you'd be surprised how many investors don’t follow them.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at firstname.lastname@example.org. I will be glad to speak with you!
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