An investment strategy is a protocol and methodology for allocating funds of a portfolio. This strategy is based on an investor’s risk profile. The more risk the investor is willing to take, the greater the potential returns, but also the higher risk of a loss in capital. There is a whole universe of investment strategies, from the least risky of buying treasury bills and government bonds with high credit ratings, to the more risky of buying stocks based on fundamental analysis, technical analysis or simply buying and holding for the long term. Some investors also look to stocks with dividends that return a yield over time, to mitigate some of the risks of the stock market.
There’s one long-term investing adage that has shown a great amount of success over the years: buy when everyone is fearful and sell when optimism is over the top. This theory worked extremely well when key stock indices fell to their lowest levels. It worked in 1987, in 2000, and then in 2009—three of the greatest times to buy stocks in history.
With this in mind, take a look at the long-term chart of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX) below. This index is often referred to as the “fear index” for key stock indices, since it is a gauge/measure of how fearful investors are about the stock market declining. The higher the index goes, the more fear in the market; the lower the index goes, the more optimism in the market.
Chart courtesy of www.StockCharts.com
The VIX clearly shows investor concern about key stock indices declining, sitting close to the same point it was at back in 2007—just a few months before stocks started to collapse.
Aside from the VIX flashing red…there are two other key stock market indicators in the trouble zone.
According to the CNBC Market Insider Activity, insiders of companies on the key stock indices continue to sell billions of dollars worth of stock monthly. The sell-to-buy ratio—that is how many shares they sold compared to how many they bought—was 10 to 1 in May, meaning they sold 10 shares for every one share bought. (Source: CNBC Market Insider Activity, last accessed May 27, 2014.) Corporate insiders have been selling their shares at an accelerated pace for some time now.
And corporate earnings … Read More
We have Russia annexing Crimea from Ukraine and interest rates set to float higher sometime in early 2015, but the S&P 500 continued to edge up to another record-high on Friday.
Federal Reserve Chair Janet Yellen is continuing to pull back on the quantitative easing that the former chair, Ben Bernanke, put in place. By year-end, the bond buying will likely be eliminated as the central bank allows the economy to try to stand on its own two feet. Of course, if everything goes well, Yellen also plans to begin ratcheting up interest rates as soon as early 2015. This could impact the stock market.
The upward move in interest rates and the elimination of quantitative easing means the easy money that had been pumped into the economy by the Federal Reserve will come to an end. This is concerning for the stock market, as the easy money has largely been the key reason why we are in the fifth year of this superlative bull stock market.
While it’s enticing to sit on all of the gains achieved so far, you should also be conscious of the profits made and should look at several risk management strategies.
The most important lesson is to take some money off the table and avoid soaking a possible downdraft in the stock market that could severely reduce your gains.
Making sure you have an exit strategy is paramount at this time.
I fully expect another downside move in the stock market sometime in the upcoming quarters. (Read “Stock Market Setting Up for Its Next ‘Fire Sale’?”)
You can also set a … Read More
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