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Embrace Market Volatility

August 5, 2008

Mark on the markets Mark Patterson

Embrace market volatility.

Last week the Dow started the week down about 250 points. The next day, the Dow was up 250. Then after a few boring up and down 100 point days, we ended up about where we started.
Even though we ended the week about where we started from the equity indices standpoint, we had some rotation of asset classes that changed the make up of many portfolios. Materials and energy had been the place to be over the last year. Financials were the place not to be. I am not advocating buying a portfolio of financials and selling all your materials and energy, but at one point there is a time to take profit in the areas that have been working and put some of that money to work in sectors that have been taken out to the woodshed, and whipped.
There is not an asset class that is the “place to be”, that works forever. Every asset class has a cycle of high and low. If you pay attention you see cyclical rotations taking place. No, you will not likely see the absolute top or bottom of these cycles, but you can change the complexion of your portfolio over time.
There are a couple of conditions that should exist in order for you to maximize the performance of your portfolio.
First, you must pay attention and want to spend the time watching and researching the markets and economy. If you don’t want to do that, get somebody and pay them to do it for you.
Second, keep a good amount of liquidity in your portfolio, cash for these opportunities when they arise. Lack of liquidity handcuffs you and forces you to sell invested assets that may not be profitable. If you work with a commissioned broker that has you in loaded mutual funds, you likely have no liquidity because they make no commission on your cash.
Third, is to not convince yourself that if you are sitting on a poor performing portfolio, that, “I am a long term investor and it will come back someday”.
With volatility high, and sectors of the markets moving swiftly, you must maximize your profits, and shorten your time frames when trading and asset classes, sectors or regions.
Trading is not bad, and in sideways yet volatile markets like these, it is a good way to help your performance.
I recommend that you use exchange traded funds or ETF’s to move about sectors, and remember, a mistimed trade is an investment.

Mark Patterson is a registered investment advisor and commodity trading advisor with MHP Asset Management LLC, and can be reached at 447-1978 or Mark@MHP-Asset.com