- Volatility strikes fear in most investors.
- Why market gyrations can actually help your portfolio.
- 3 reasons you should embrace sudden market shifts.
- Also recommended: What happens when you add rocket fuel to tiny stocks?
That is because volatile markets are frequently associated with losses as asset prices gyrate.
But believe it or not, volatility is actually a good thing for long-term investors.
Better yet, even short-term investors can harness the power of volatility — booking massive returns in small time frames.
Senior analyst Jonathan Rodriguez breaks down exactly why below.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Three Huge Upsides to Volatility
No matter how you trade stocks as a long investor, the basic idea is to buy stocks that will be worth more tomorrow than they are today.
And over time, stocks have an upward bias.
Consider that in the last 50 years, the S&P 500 has returned 7% annually, including dividends.
If you’re an investor aiming to beat the market, volatility is your best friend.
Big price swings allow investors to take advantage of temporary dislocations of a stock’s current price from its “true value.”
During these turbulent times, long investors can scoop up shares of great companies at sometimes fire-sale prices.
Or by positioning themselves just right, investors can get into stocks primed to pop — and let a volatile market hand them profits.
Here are three examples of how you can get in on the action…
Volatility Play #1 — Earnings Reports
As you may know, for an individual stock, the most volatile periods are always around its quarterly earnings reports.
Investors get four reporting opportunities a year on thousands of publicly traded stocks to position themselves for big profits.
Let’s say a fundamentally sound company that’s growing sales and earnings well over the period of several years reports a bad quarter and its stock drops 5%.
If the quarter represents a short-term misstep, then investors are looking at a 5% discount on a quality stock.
Volatility Play #2 — Natural Disasters
Mother Nature is one of the single most powerful forces on Earth.
Natural disasters such as hurricanes, earthquakes and volcanic eruptions move stocks — fast.
It’s not just weather disasters that disrupt share prices, either.
The deadly Ebola outbreak of 2014–16, for example, claimed the lives of more than 11,000 people in Africa.
Between September and October of 2014— the peak of the outbreak — the S&P 500 fell 8%.
Shares of American Airlines Group Inc. — America’s largest airline company — fell 30% from their September 2014 peak to their October 2014 low.
To put that into perspective, the plunge was more than three standard deviations from the stock’s 50-day moving average at the time.
But a savvy investor who bought the American Airlines dip in October would have made an 86% gain on the shares by the end of the year as the stock recovered.
Volatility Play #3 — Takeovers
Thus far, we’ve covered two great ways to pick up stocks at a discount after a big move to the downside.
But one of the best ways to bag a big gain quickly is to be ahead of the move.
And there are few catalysts more powerful than mergers and acquisitions.
2016 was the third-largest year for global M&A, with $3.7 trillion worth of transactions made.
Companies that make for attractive takeover targets can see a one-day rise of anywhere from 20–60% in their stock on the announcement of a deal.
For instance, Intel Corp. struck a $15.3 billion deal to buy semiconductor company Mobileye NV in March.
Mobileye’s stock soared 13% on the day the deal was announced.
And with a huge tax cut on the Trump administration’s legislative agenda, the next two years could be record-breaking for takeovers.
Bottom line: Investors should embrace volatility, rather than run from it. Some of the largest gains ever harvested will come from buying the dips — or being ahead of the pack on a major market-moving event.
On the hunt,
Senior Analyst, Wall Street Daily