A 10-step Market Volatility Plan

30th Dec '22 by Elio D'Amato

5 comments 657 reads

It leaves many with a sick feeling in the stomach.

For a month now, investors have witnessed heightened volatility in their stocks, particularly those outside the S&P/ASX20. Wild daily swings have become the new normal, for example, it is likely this shortened trading week will result in the first positive week in four for the S&P/ASX200 and All Ords - but it doesn't feel like it right? (Update 31/12: the market actually finished down for the week. Which felt totally normal to me at least)

Fundamental investors are scratching their heads wondering why the market doesn’t see the underlying quality of their businesses. And traders are getting whipsawed in and out of positions, which at the end of the day… just makes brokers rich!

The outcome of this heightened volatility is that many investors let go of their portfolio’s virtual handlebars, choosing to close their eyes to the reality, rather than confront their current performance. A phenomenon which is common at this time of year.

I do empathise with those that are particularly stressed due to an over exposure to the market. Whether you are a seasoned fund manager or dabbler in shares, rapid moves such as this, particularly to the downside, can often raise challenges psychologically and it’s easy to just think it’s all too hard, and want to simply throw in the towel. But I urge you, do not let go of the steering wheel leading into 2023.

Notwithstanding the economic impacts of any looming global recession or rising interest rates, many of us accept that this tough period will eventually pass, just as all the others before it have. Companies who do survive and have high factor scores (that you hopefully hold) will thrive as better days return to markets.

However, if you have experienced pain and stress in the lead up to the end of this calendar year (a time which normally is one of peace and fun), then outlined below is a 10-step market volatility plan that will hopefully put you on the right side of the eventual recovery, or at the very least, be in the best position to ride out any continued volatility.

First, is the painful step of getting rid of any business you don't truly believe 100% in, or fail to meet your technical criteria. Even if the losses you sit on are huge,…

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Sagie5

30th Dec '22

Thank you, Elio.

Hi Elio,

I have a plan which is closely alligned with your guidance, following all the strategies you've mentioned since the downturn earlier this. As a short term investor, portfolio size and value has dropped with , "got to eat" expenses,sell downs and slowing growth if any at all.

At the moment I'm holding some cash, and only using funds from triggered stop losses to maintain a half to 2 third position in holdings over the next two months or until the Feb reporting season is over.

Thereafter, hopefully things turn for the better and were out of the down channel and holding ,it is then that i anticipate starting to increase my exposure.

Good luck, everyone. Hopefully everyone of us have a rewarding new year and in good health.

Cheers

Sagie

Badgersbrook

Wise advice Elio!

I was going to say I found your advice enlightening until you put the boot in and said 'it is obvious that you haven’t had an investment plan to follow'. Alright, alright! Don't rub it in!

Seriously though, as a complete novice to this, as someone who until his early 50s had never invested in anything other than a building society account, this year has been a steep learning curve and I recognise painful mistakes that chime with your advice above. Two examples, buying SCS (LON:SCS), a fundamentally sound company, and then selling because I'd just read Bill O'Neill's book and he said always set your stop loss at 8%. And then of course watching the price go up after I sold. When the correct strategy should have been your point 7: 'If you buy a stock for the long-term, then switch off and only make a further decision after the company’s next report.'

And then my big momentum mistake was buying a stock I knew was volatile, especially in the current geopolitical climate, Adecoagro SA (NYQ:AGRO), watching it rocket up 30% and then watching it come right back down having failed to take profits! (your point 8).

I have much to learn....

Elio D'Amato

I will let you in on a little secret Badgersbrook...

I didn't learn about these experiences because I read them in a book... its because I made the same mistakes you made over and over again. So many, I can't even recall specific examples anymore.

In fact I have made so many mistakes in the market, I'm now considered an expert.

Your experiences ring true to all of us... at the end of the day the actors may be different but the plot remains the same. Just like a new interpretation of Shakespeare's Romeo & Juliet. Sure the costumes and settings may be more contemporary ... but at the end of the day, they both kick the bucket.

Let's face it, the market is a great mentor. It's very generous in teaching us lessons, if we are willing to learn from them.

And I've had so many lessons taught to me over the years, I have paid the equivalent of a Brighton College multi-semester tuition fee. (Feel free to insert whichever well healed school you want here if you're feeling patriotic)

Thanks for sharing your experience and here's hoping 2023 is a little lighter on the tuition fees for all of us.

Hope springs eternal Sagie,

Never fun moments like this, but you know, markets go up more than they go down over the long term. So we just have to make sure we can all get a good night's rest and have enough pennies to stay in the game for another round when hopefully the odds fall in a favour

A 10-step market volatility plan

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Elio D'Amato

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