Just days ago, we highlighted multiple ways to protect for potential volatility.
Those included hedging for downside with the following:
- ProShares Ultra VIX Short-Term Futures ETF (UVXY) -- As volatility ticks higher with the trade war, ETFs such as the UVXY run higher. ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index.
- VelocityShares Daily 2x VIX Short-Term ETN (TVIX) -- The TVIX is another great way to trade elevated volatility. This ETF tracks an index of futures contracts on the S&P 500 VIX Short-Term Futures Index. As volatility ticks higher, the TVIX ticks higher.
- iPath S&P 500 VIX Short-Term Futures (VXX) - As volatility returns, one of the best ways to profit from volatility is with the VXX ETN, which provides exposure to the S&P 500 VIX Short-Term Futures Index Total Return. In simple terms, as volatility shoots higher, so does the VXX.
Other ways to stay ahead of the “madness” include:
Keep an Open Mind
Being open to investment strategies is generally a good thing, even if you think you’ve got something that works well already. If you chase and deploy all of them you’ll end up complicating the whole process and your performance will suffer.
The key is to focus and become intimately familiar with the approaches that align with your investment style as we discussed above. Ultimately you must develop entry and exit systems to take as much emotion out of the equation as possible. Know your risk tolerance and make sure you have protective points in place to preserve capital.
Know Where the Best Profit Opportunities Are
I tend to search for investment ideas in small-cap stocks.
According to Smart Asset:
“Between 1979 and 2015, small-cap stocks in the Russell 2000 index outperformed large-cap stocks in the S&P 500 20 times within 37 years. In terms of the average annual return on investment, small- and large-cap companies’ stocks were virtually neck and neck, with the S&P 500 paying investors back 11.7% annually versus the 10.3% annual returns generated by the Russell 2000 index. In the long run, investing in smaller cap stocks may be just as profitable (if not more profitable) than investing in larger ones.”
Always, Always Have a Plan
Have a complete 360-degree view of what is necessary when markets are stretched.
Fundamentally, take a look at what’s under the hood of the company or the markets with regards to earnings ratios. Technically, understand what’s happening in the short- and long-term.
Above all else, know your exit strategy, and your money management strategy, including stop losses and trailing stop losses. Never risk money you cannot afford to lose.