Should you be invested in the stock market now or wait out the current Delta variant volatility?
The CBOE Market Volatility index (VIX) hit a recent high this week of 19.48 after being relatively flat at ~16 for the month of August. The recent spike in stock market volatility clearly has to do with the uncertainties surrounding the delta variant of the coronavirus. It may also have something to do with the recent unfortunate upheaval in Afghanistan. This has raised the question (I've had many ask me this) if they should stay in the markets (many got in when the stock market started to pick up after the last crash when the pandemic started) or leave temporarily until things calm down a bit. This post will describe my thoughts on the issue but please don't take this as investment advice as you should consult your investment advisor before making investment decisions.
It may be time to take some profits...
If you have stocks that have done well due to the last upcycle, it maybe prudent to take some profits at this time. The reason for this suggestion is that the path and time scale of the delta variant is still quite uncertain and no one truly knows how it will play out in most economies. We really could be seeing more lockdowns in most countries in a matter of weeks. This means that one will be taking on quite a significant amount of risk holding a stock that has already turned a profit. I am one of those who believe that if you are not greedy, you will always make money from the stock market.
How far are you from retirement?
If you are close to retirement, you really should have your funds now in low risk investments which should not be affected much by the current market volatility. However, if you are further from retirement, it's a tougher call. While timing the market is generally not a winning strategy, there are periods such as these where sitting on the sidelines will make sense from a risk perspective - just don't sit on the sidelines for too long (the devil is clearly in the details when it comes to market timing:-).
Do you dollar cost average?
One of my most successful investment strategies is to always dollar cost average monotonically in each stock market direction. For example, if the market is going up and I am in a loss position, I generally buy "optimal" lots as the price keeps going down and I stop buying once the price trend reverses upwards. The reverse also holds true i.e. once I've decided to sell and take some profits, I sell optimal lots as the price rises until the price trend reverses downwards. Clearly, the challenge in executing this strategy (apart from having your emotions in check) is to determine what your "optimal" lot size is and the simple answer is that it really depends on a few factors such as investment size relative to average exposed volatility, transactions costs etc. It will probably take another post and another day to expand more on this concept.
What is your risk tolerance?
Finally and probably most importantly, if you really can't sleep at night if your investments loose value, then you should not be in the markets and especially not now. Move your funds to low risk investment vehicles and wait out the current volatility regime, the delta variant and the US war on terror. It may not be the best strategy for your future net worth, but at least, you will live long enough to determine that for yourself:-)
Yours in learning,
