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Tackle Today: How to Weather Volatility

December 9, 2021

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Tackle Today: How to Weather Volatility
Photo: ‘Barometer’ by Allen Watkin on Flickr.

« You’re not defenseless, you know. »


The equity risk premium tells us stocks pay higher returns as compensation for their higher volatility. History reveals how frequently corrections and bear markets arrive. These dramatic downturns will continue to haunt investors until the end of time.

So what do you do about it? How do you weather the volatility?

Here are three potential solutions:

First, and most relevant to long-term stock investors, make sure your portfolio allocation matches your risk tolerance. If you place $100k in the S&P 500, you will see a $10k drawdown on average once every year and about a $30k drawdown once or twice a decade. If you can’t handle that, then shift the allocation so you have less in stocks and more in safer, less volatile assets.

Second, use options to control your risk. This is the principal subject covered in the Bear Market Survival Guide. For example, you can buy protective puts and sell covered calls to reduce your exposure dramatically.

Third, become a more nimble, active trader that quickly adjusts when markets sour. Standard technical signals tell you when the trend is turning lower. And these arrive well before the market has lost 20% to 30% of its value. You can minimize any damage inflicted if you respond to them by cutting bullish positions and potentially adding bearish positions.

Each approach has its tradeoffs. What matters most is that you have a plan that works for you, and you stick to it.

Chart of the Day: December Seasonality

Chart of the Day: December Seasonality

You’ve heard of bullish seasonality in December. Here’s what it looks like. The dark blue line shows the flight path of the average December. Not how the back half of the month is where the tailwind kicks in. The orange line shows the average performance if stocks closed lower in November (which they just did for this year). And the light blue line shows the average performance is stocks were up 20% for the year by end of November (which they were this year).

Video of the day: Gino’s Gems – How to use the Average True Range indicator (ATR)

In today’s Gino’s Gems, Coach Gino teaches how to use the Average True Range indicator (ATR).

Today’s Line up

Traders Lounge 11 PM EST

Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.

Cashflow Club 8:30 PM EST

Held every Thursday before Friday’s option contract expirations, this show helps you perfect your favorite cashflow strategies.

Halftime Report 12:30 PM EST

The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day, and fun in a way that only Matt and Tim can deliver.

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