Rooting for the Down Days

What is it about a plunging market that puts me into such a good mood? Maybe it’s a throwback to the old options trader in me—you know, with volatility, especially on the downside, comes opportunity; and with opportunity, comes money-making potential! I have found that some of my best trades have occurred when everyone around me is panicking, so why not root for a little anxiety attack every now and again?

Perhaps you were busy re-reading War and Peace yesterday, so let me recap what happened. A day after stocks rallied on the heels of a Federal Reserve quarter-point interest rate cut, investors sold off stocks in a big way. Yes, there was a downgrade of Citigroup and below-forecast earnings from Exxon Mobil, but I think that the essence of the sell-off was investors worrying that maybe the Fed would not keep cutting rates as expected. All three major indexes lost more than 2% of their value, with selling accelerating late in the day. The Dow Jones Industrial Average fell 362.14, or 2.6%, to 13567.87; the S&P 500 fell 40.94, or 2.6%, to 1508.44; and the NASDAQ fell 64.29, or 2.3%, to 2794.83.

There is no positive spin on the day—it was pretty rotten. Except if you’re like me and can convert those sour lemons into tasty lemonade. Of course, you can only take advantage of market gyrations if you have cash on hand. That’s why when people ask why they should allocate any of their money in the money market fund in their retirement accounts; I respond “you never know when you are going to want to do something!”

If you are always fully invested or mostly invested in risk assets, when the market moves, you can’t do anything but watch and pray that your positions don’t get beat up too much. I have always believed that a nice tidy pillow of cash, augmented by the warm blanket of government bonds, can cushion downward moves perfectly. Maybe you won’t even make a trade, but sometimes that cash/bond position is just enough to remind you that panic is for the other suckers, not for you, Mr/Mrs/Ms Diversified Investor!

What do you lose by employing a diversified approach to investing? The only thing you don’t get is bragging rights. When the market rises, you will not see your portfolio increase by the same margin as the overall market. Then again, when the tears are flowing as the market gets crushed, you can calmly assess the situation and determine if any action is warranted. At the very least, you’ll have many more good nights of sleep, so come on and root for the down days—you’ll see how freeing it is!