Preparing for A Summer Swoon

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A while ago, I worked for a short time as a financial advisor for a major Wall Street firm. I quickly learned that that was not the place to pursue my vision of “pulling back the curtain” on the practices and thought processes of the dealing room. That was not all I learned, though.

I learned a lot about protecting investors from themselves. I started in 2010 and as I built a client base I found that most of them felt the same way. They were scarred by the recession and the accompanying market drop and saw every minor setback in the nascent recovery as a harbinger of doom.

I have remained in contact with many of them, and recently the fear has returned, this time on the basis of “what goes up must go down.” What I said then is still relevant today.

At the time, it seemed to me that I had two main roles, dissuading those that had sat out the turbulence to that point from selling every time there was a down day, and encouraging those sitting in cash to get back in. To assist, I had, on the wall behind my desk, a framed, giant copy of a chart such as the one below, showing the long-term history of the Dow.

I would point to it with particular reference to market “crashes” that seemed cataclysmic at the time, such as “Black Monday” in 1987, that now barely register as blips.

The point is obvious. If you are investing for the long term, paying attention to market volatility, no matter how scary it seems or in which direction it is flowing, makes no sense. As we get into the summer, with many reasons to expect a “summer swoon” in stocks, that point has renewed relevance.

So far, the market has essentially ignored the threats that make a drop in the market possible. Valuations are above average, but economic growth is strengthening, and corporate profits are high and getting higher. Talk of a trade war has, to this point, been seen as just that, talk.

The feeling seems to be that all sides are aware that nobody will win a battle of escalating tariffs and that what we are seeing is a high stakes game of chicken. Even a rising rate environment, in China and Europe as well as here in the U.S., is being viewed as a sign of strength rather than a real threat.

On days like today, however, when futures indicate a significantly lower opening, all those arguments look like excuses and it feels like a big drop is a real danger. If anything, for the fearful the refusal to react to the threats is just a warning sign.

One of the other things I learned dealing with clients is that logic and a long-term chart only go so far. Fear is a powerful emotion and the best way to deal with it is to do something to offset it, so when clients were fearful I encouraged them to hedge their portfolios. Just having something in their account that made money if the market retraced was usually enough to stop them making bad decisions based on short-term volatility.

The knowledge that they had seen it coming and done “something” to offset it calmed the nerves.

If you are looking at all the potential problems going into this summer and feeling fearful, you may want to consider doing the same. My preferred method would be to buy something like the Vix-tracking ETN, VXX. Conventional wisdom is that the exaggerated leverage and volatility that comes with a derivative of a derivative of derivatives is not something that should even be considered by the average investor, but that is to ignore the purpose here.

Buying VXX for the summer is an insurance policy, and like all insurance it is about peace of mind. You should go in knowing that the most likely outcome is a loss, but that if that potential loss stops you doing something based on emotions rather than logic, it is a cheap price to pay.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Economy , Stocks
Referenced Symbols: VXX

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Martin Tillier

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