Navigating the Pandemic: Strategies for Recovering from Market Volatility
The coronavirus pandemic has undoubtedly caused significant upheaval in global markets. Many investors have experienced financial losses, and the question of how to recover is a pressing one. In this article, I will share personal experiences and strategic approaches to navigating such volatile times. Whether your portfolio tanked or you managed to stay steady, understanding the principles behind different investment strategies is crucial.
Personal Experiences and Portfolio Performance
For my personal investments, I have been fortunate enough to not lose any money as a result of the COVID-19 pandemic. Three of my investment accounts are up by 33%, 34%, and 54% respectively. Dips, corrections, or crashes – these can often present profit-making opportunities. However, my primary retirement account, which I did not touch, is down by about 13% for the calendar year. Despite this, my plan remains to ride it out, as I have invested in solid dividend-paying stocks in good industry sectors.
On the other hand, my non-retirement investment account, which I managed actively, is up by about 20% for the year. This success can be attributed to missing major down days and catching some of the big up days. While this performance is commendable, it is important to recognize that market volatility can make recovery challenging.
The Impact of Market Volatility and Strategic Investing
Market volatility caused by Covid-19 has been uncomfortable for many. However, it has also exposed the limitations of traditional investment strategies like diversification under extreme market conditions. Conventional strategic asset allocation works well in stable markets, but it often fails during severe market downturns, as evidenced by the mounting losses many individuals have experienced.
For instance, in a recent update, the actively managed funds in my portfolio have recovered to gain 20% of their total value. The managers implemented tax harvesting to lower our tax burden, adding to the overall value.
Understanding Momentum Investing and Its Advantages
Momentum investing, a strategy based on the belief that assets with higher prices are more likely to continue rising, can offer a different approach to managing volatile markets. By using momentum as a decision-making tool, I exited riskier asset classes at the end of January and have been sitting in intermediate duration treasuries since then. A similar, leveraged program has yielded a 35% return.
While momentum investing is not suitable for everyone, the key principles are applicable. It allows investors to make objective, quantifiable, and testable decisions about when to take exposure to the markets, without relying on subjective predictions. Although momentum cannot predict global viral pandemics, it can provide a more robust approach to timing market entries and exits.
The benefit of this approach is that it allows investors to start from a much higher asset base, reducing the need for risky plans to recover lost funds. By not relying on diversified and passive strategies, investors can focus on simpler, more proactive methods that align with their investment goals and risk tolerance.
While this strategy requires some shift in thinking away from conventional financial advice, the rewards can be significant. The objective quantification of momentum makes it easier to manage portfolios with minimal research and regular attention, allowing investors to maintain a balance between risk and return.
Conclusion
In conclusion, the COVID-19 pandemic has brought significant challenges to the investment landscape. However, understanding different investment strategies and their applications can help navigate through these tough times. Whether you have lost money or have remained steady, incorporating strategies like momentum investing can provide a more resilient approach to financial recovery.
As always, it is essential to consult with a financial advisor before making any significant investment decisions. The principles of momentum investing offer a tested and proven method to manage markets, providing a robust foundation for long-term financial success.