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How Should Investors Handle a Volatile Stock Market?

When the market moves like a roller coaster it creates opportunity for investors and traders.
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When the market starts the day down by hundreds of points then finishes in the green, it can be confusing and exhausting for investors and traders. The same can be said when the opposite happens and big gains end up being wiped out before the close.

Huge market moves can be hard for investors and traders to process. There's opportunity when the share price of good companies falls, but identifying those opportunities can be a challenge.

That's a challenge that TheStreet's Real Money and Action Alerts PLUS teams provide answers to when the market gets volatile. It's not a simple answer, but TheStreet's premium subscription team has strong opinions that can help you make better investing decisions when it comes to using your capital in a volatile market,

Volatility Lead

James "Rev Shark" DePorre: Real Money Contributor and Founder of Shark Investing

Everyone is a genius in a bull market. One of the biggest dangers in a bear market is style drift. Traders let short-term trades turn into investments because they let inertia take hold. Investors panic sell long-term positions because they let emotions take hold.

The first step in dealing with a bear market is to mark to market. Forget your cost basis and treat each stock you own as if you bought it today. Don’t let unrealized losses or gains influence your decisions.

The next step is to have a plan and be very clear about your style. At what point do you buy more? Where do you set stops? Inertia is your biggest enemy in a bear market. You have to have a plan.

That doesn’t mean you trade wildly. It means that you are ready to take action as conditions shift. Think opportunistic rather than pessimistic.

Bob Lang: Options Expert and Co-Portfolio Manager, Action Alerts PLUS

Increasing or elevated market volatility can be a blessing or a curse. One can take advantage of short-term panic situations to scoop up high-quality companies with good earnings/growth, strong dividend payers with dominant market share. When the "baby is thrown out with the bath water" it is the most savvy investor who wins in the long run. We don’t see these opportunities all that often, but recently March 2020 and then back to the 2008/09 financial crisis were great examples.

But we mostly become fearful and jaded when volatility starts to rise. That is because our fear permeates when we start to lose money, fearful that we’ll never get it back. That is an irrational thought of course, but we are all guided by the fear/greed within us. The fear and panic is manifested by the unknown, we just cannot predict what happens next. The fear often turns into massive selling -- get me out at any price. But remember, nobody ever got rich in a panic.

As a short-term options trader, I embrace the volatility, taking a "glass half full" approach, looking through the lens of opportunities in the market. The big spikes in volatility do not last all that long, and when they are gone you have missed out (only to come back when we are not ready for it). While market timing can be a successful method, it’s not my preferred style. Rather, observing the oversold market, higher volatility, feeling the panic in the air, and rationalizing the situation are my tools (along with technical indicators) to find the gems that will lead to riches. In the end, no panic here but eyes wide open for new opportunities. The VIX is elevated now, panic is starting to happen -- time to find some ideas for long-term holds.

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Stephen “Sarge” Guilfoyle: Author of Real Money's Daily Market Recon Column and Former NYSE Floor Trader

Alright, I really am a trader, investor, macro-economic strategist, etc. I don't have a type. I rely on both fundamental and technical analysis. Those reliant upon just one style will either not know which way the bus is moving or where the bus stops are.

What I tell folks when times get tough, and I have been telling the good people of planet earth this since November is to get "skinny." I don't care if you hang around at Burger King all day, running skinny in this game means that when you are unsure, reduce one's number of open positions to whatever is manageable for them, and reduce the size of those positions to whatever helps them sleep at night.

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Carry less exposure overnight and into weekends. Then, remember the rules of engagement. Target prices, pivots, and panic points on everything. If you don't know where you want to go, and where you're not willing to go, the market will eat you for lunch.

In addition, you don't have to do this, but I always do this... I never allow myself to lose more than 8% on any single position unless it happened overnight (sub-$20 stocks are exempt for obvious reasons). Imagine how much money you probably lost in 2022 alone, if you did not live by this rule or something similar. As in all facets of life, victory can only be won through hard work and discipline.

Paul Price: Real Money Pro Columnist and Value Investor

I like to say that, “Nasty sell-offs are not price declines, they are value rallies.” If you liked a stock at $40, and there has been no negative company-specific news, you should absolutely love it at half price or better.

Here’s how I deal with my personal accounts in times of turmoil.

  1. Triage your portfolio holdings.
  2. Sell relatively strong, typically conservative, stocks and redeploy your cash into lesser quality, but still healthy and profitable names.

Triaging involves going back to basics. Take a fresh look at every stock you hold under current estimates and economic assumptions. Would you buy it today at its present-day quote? If not, consider swapping into something more attractive. If it still appears promising, consider owning more.

Ed Ponsi: Real Money Pro Contributor and Professional Trader

Be Nimble – Don’t be afraid to take a small loss on an investment. The unwillingness to take a small loss causes investors to hang on when they should bailout. Sometimes this works out, but sometimes it snowballs into an unacceptably large loss. Discretion is the better part of valor; when in doubt, get out.

Reduce or Eliminate Leverage – There’s never a good reason to use most or all of your buying power. Newbies who haven’t experienced markets like those in 2000 and 2008 probably aren’t aware of how far and how quickly prices can move against them. While a high degree of leverage can magnify gains, it has a similar effect on losses and can lead to a margin call.

Examine Your Holdings – Sometimes, the stocks that have had the biggest runs are the very names that are most susceptible to sharp declines. Take an objective look at your portfolio. If your holdings are concentrated in an area that was strong last year, it’s time to reallocate your funds.

Chris Versace: Thematic Investor and Co-Portfolio Manager, Action Alerts PLUS

Periods of extreme volatility can be nerve-wracking for investors as investment frameworks, valuation metrics, and common sense tend to be put to the side, replaced by a “shoot first, ask questions” mentality that produces an overreaction, usually to the downside. When we think of investors, and by that we’re talking about folks with a medium to longer-term investment horizon, environments like the current one can offer prepared and patient investors an opportunity to get involved with high-quality companies with solid balance sheets and cash generation attributes at far better prices than several weeks or several months ago.

Sounds easy, but it means doing some homework. Rather than getting caught in every tick and tack of the day’s trading, investors should roll up their sleeves to not only understand the drivers behind a prospective companies business as well as its opportunities.

Checking the corresponding economic and industry data as well as the latest comments from competitors, customers, and suppliers to double-check the near-to medium-term outlook. Once you’ve determined there the business opportunity is sound, it’s time to determine your entry point. My suggestion is to look across a variety of valuation metrics ranging from historical P/Es, dividend yields, and enterprise value to EBITDA metrics to understand where the shares have peaked in the past, but more importantly where they have tended to bottom out. Based on that, you can formulate your entry plan.

We’ve been doing just that over at Action Alerts PLUS, and we are building our shopping list for when the stock market enters calmer waters.