Chief Investment Strategist, The Freeport Society
Well, that was unpleasant.
If you’re like a lot of investors, you’re probably still licking your wounds from Monday’s market rout.
The CBOE Volatility Index – the “fear gauge” better known as the VIX – had its highest single-day spike in history… bringing back memories of the wild market moves we saw in the early days of the 2020 COVID panic.
Stocks stabilized on Tuesday and today… to an extent. But by the end of the trading day, the S&P 500 had given back most of its gains from earlier in the day.
Today is a new day…
In my experience, a volatility burst like that is rarely “one and done.” Remember, we’re living in the Age of Chaos… so volatility is normal. Expect it.
The question is: What do you do about it?
I’m not going to pat you on the head and tell you not to worry. That’s condescending, and you’re more than capable of hearing and processing the truth, which is that there’s actually plenty to worry about, depending on how your investments are allocated.
We have a mushrooming government debt catastrophe and an inevitable dollar crisis, to start… not to mention the potential that our economic decoupling from China could snowball into literal World War III.
Then there’s the everyday worries of nagging inflation and the possibility that the Federal Reserve pushes us into recession in an attempt to fight it.
So, let’s not delude ourselves. We’re not permabull Pollyannas.
But let’s not let a sensible awareness of risk cause us to miss out on good opportunities.
If I abstained from investing because I was worried about governmental incompetence, I would have kept my cash buried in my backyard for the past 47 years and missed out on millions of dollars in profits.
So, with all of that said, let’s implement a Freeport Action Plan for making it through this correction…
Consider Your Allocation and Position Sizes
Firstly, there’s an old trader’s maxim that you should “sell to the sleeping point.”
In other words, if your investments are keeping you up at night, you’re taking on too much risk.
That doesn’t mean you should immediately dump everything and go to cash. It simply means anxious investors should take a little money off the table and reduce the size of your exposure. Maybe, instead of owning 100 shares you slim down to just 80… or 50… and then monitor the rest of the position.
Secondly, it’s well documented in the behavioral finance literature that investors make poor decisions due to “regret avoidance.”
It’s psychologically devastating to sell a stock when it’s down because it makes it “real” and it’s an admission that you’re wrong.
Plus, you just know that the minute you sell it, it will start rising again.
So, rather than sell a position at a small loss, you end up riding it lower and then eventually sell at a much lower price… doing a lot more damage to your portfolio.
That’s the price of regret avoidance.
And it’s something we all deal with. But there are tricks to managing it.
Have selling rules such as stop-losses. If you make your trading rules-based, then you’ve taken the decision out of your hands… and you don’t have to fret about it.
You can also enter and exit certain positions in stages, which is something I do. This helps me to manage my potential regret of buying too early and taking losses… or selling too early and leaving gains on the table.
What About Your “Permanent” Positions?
I have trades that I intend to hold from anywhere for a few days to a few years. But they’re trades. My decisions to sell these are based on rules.
But I also have “permanent” positions that I intend to hold forever.
For example, I will always own a little gold. And unless some new tech substitute comes along, I will always own a little crypto. I also own a handful of super high-quality stocks that I intend to hold for the rest of my life, reinvesting the dividends along the way. Plus, I always want to own at least a little real estate.
But that doesn’t mean I don’t rebalance and trim back positions when they get a little too big relative to the rest of my portfolio… or buy more if they’ve fallen under my ideal target.
A sharp volatility spike is as good a reason as any to check your portfolio weights.
Perhaps most important is to simply not let fear paralyze you.
When the market goes into convulsions, sit up and look out for the real bargains to pop up. If you see a good stock at a good price – like the “Rich Man’s Super Currency” stocks we hold in The Freeport Investor – don’t be afraid to snap up some shares while they’re cheap.
Finally, remember that The Freeport Society is your port in the storm. We’re here to not only show you where opportunities lie… but to warn you of dangers when necessary… and arm you with knowledge to help you navigate the chaos.
To life, liberty, and the pursuit of wealth.