On 18 different trading days in September the Dow Jones
industrial average swung by at least 200 points. In one week,
it moved more than 400 points a day for four days straight. One
day last week, on Oct. 4, it abruptly reversed a sharp drop to
jump more than 400 points in less than an hour at the close.Get used to it. Those sharp swings are likely to be part of
the landscape, as trigger happy computer traders move large
amounts of money in and out of stocks in seconds, while the
market’s long-term direction remains uncertain in the absence
of clear signs from Europe, the U.S. economy, federal deficit
cutters and more.Of course, it’s easier to take those volatile shifts when
they are on the upside, sending averages and portfolios
skyward. But if you want to feel good about your finances
regardless of the direction of the daily lurch, consider using
the volatility, instead of avoiding it. Here are some ways to
do that.— Pay attention. It’s one thing to set up an automatic
investment plan and not panic every time the market changes
direction. But the old “set it and forget it” strategy seems a
tad out of touch now. “Investors are better served with a
buy-and-monitor strategy as opposed to simply buy-and-hold,”
says Jason Ware, an analyst with Albion Financial Group. He
suggests that investors keep an eye on the market and, more
importantly, on what’s going on in the economy. “This keeps the
investor more nimble.”Does that mean you want to day trade? Probably not. But if
you have a list of stocks you want to buy and shares tumble,
you could be ready to go in and pick them up. You could also be
prepared to sell losing stocks (to lock in tax losses) on those
killer down days.— Buy strategically. Long-term investors are often
encouraged to “dollar cost average.” That’s when you invest the
same amount at regular intervals, such as $200 a month, in the
same mutual fund or exchange traded fund. The advantages of
that are magnified in a volatile market. When prices are down,
you will buy more shares (at a lower average cost) than when
prices are high.But you can magnify that advantage even more by using a
technique called “value cost averaging.” To do that, you adjust
the amount you invest every month, based on the price moves of
the security. So, if you put in $200 the first month, and the
price of the stock or fund falls 4 percent, the next month, you
would put in an additional 4 percent — investing $208 instead
of $200. If the share price rises, you would adjust your
investment downward instead.— Bet on volatility. Instead of guessing whether shares
will go up or down, you could somehow put money down on the
idea that volatility will reign. After all, the VIX, an index
that measures the volatility of the Standard and Poor’s 500
stock index, is up 104 percent so far this year. One ETF — the
ProShares II VIX Short Term Futures ETF — gained 124 percent
in the three months between July 8 and October 10, according to
Lipper, a Thomson Reuters company. But investing in those
VIX-linked funds is risky and best left to investors who
understand market fundamentals and technicalities, says Jeff
Tjornehoj, a Lipper analyst.— Play it safe. Instead of riding volatility, you could try
to insure against it. Ware says volatility is usually
reflective of fear, so safe assets like gold and Treasury bonds
will continue to do well when volatility spikes. Some funds,
like the Bridgeway Managed Volatility Fund or the SEI Managed
Volatility Funds, aim to pick up most market gains while
damping volatility. Kevin Crowe of SEI says his funds do that
by aiming at market sectors, like consumer staples, that have
lower rates of volatility, and then by filling in with
companies, like ExxonMobilor IBM , that tend
to be more stable.— Cherry-pick the stocks you buy. During the big moves of
2009 and 2010, stocks in the same sector were well correlated
with each other, for the most part. But recent volatility is
resulting in a situation where individual stocks are going
their own way more. That’s partly a result of big sector themes
having played themselves out, according to Ware. For example,
he pointed to the retail sector. “The easy money has been made.
Next year you’re going to have to mine through for the best in
breed and look for good sustainable brands.”
