The current market is giving everyone jitters. The volatility has not decreased after 2 weeks and it is very hard for people to hold on to their losses. The Federal Reserve is meeting central bankers (Jackson Hole meeting) around the world 26 Aug 11. It was the same meeting last year that the Fed hinted on QE2. Would the same thing happen this year? Would the hint of QE3 stimulate the stock market?
No one knows the answers to the above questions and that is what makes investing so difficult. You are put at the cross roads now, do you sell and keep your losses small? Or do you hold on for possible good news? For those who did not have much stocks, is it time to go into the market?
Given the fundamental weaknesses in the United States and the Euro zone, things are really not rosy. The I am holding quite a number of stocks and have not sold any yet. My portfolio is down about 10% and I am planning what I should do next. Earlier this week, Germany and France refused to agree to the issuance of Euro Bond which a potential good news turned bad. If the upcoming Jackson Hole meeting conclude that QE3 is not happening, market is going to react very adversely.
Our fate lies in the hands of these policy makers now. But what can we do to protect ourselves? Below are the 5 options:
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Option 1: Buy put warrants/options
This is an insurance policy. If market continues to have bad news, holding put warrants/options would give you profits when the prices dive. I have just taken a look at the available STI put warrants listed on SGX. All of them are already in-the-money and I do not think it is advisable to buy them now. I am looking at strike price 2000 within the next 3 months but they are not available. Alternatively, you can look at the US options market which I believe would have more contracts for you to choose from.
Advantage: If market goes down, my losses in stocks would be reduced by the profits from my warrants/options. If market goes up, I will lose all my money in warrants/options, but I will gain in stocks.
Disadvantage: If the market stays stagnant, I will lose money in warrants/options and I do not gain much from my stocks. Since the market is very volatile, warrants/options are very expensive now.
Option 2: Liquidate
I have contemplated to sell all my stocks as one of the exit options.
Advantage: No worries anymore. Accept the loss and leave the market. Further losses will not decrease my capital. I can always buy back at a lower price.
Disadvantage: If good news push the market up, it will be very difficult for me to buy back the stocks at higher prices.
Option 3: Do nothing
This is probably the most comfortable thing to do for me. Just keep all my stocks regardless of what would happen.
Advantage: If the market ride through this rough patch, I would be able to enjoy the potential profits.
Disadvantage: If the market goes very much lower, I will lose a lot of money, even if it is paper loss. And it would take years to get back to where I were in the first place.
Option 4: Increase monthly contribution to STI ETF
I am currently contributing S$600 monthly to buy STI ETF. This Dollar Cost Averaging method has proved worthwhile. Since I do not know what will happen to the market, I just buy on a regular basis to average out the price. I can push the contribution comfortably to S$1,000 and take advantage of the market weakness to buy STI ETF cheap. I intend to do this long term hence it is possible for me to sell when market is good and accumulate when market is bad.
Advantage: Do not need to worry about market ups and downs. Just keep accumulating and sell when market is euphoric. If market happens to rebound, I would still in a position to ride the profits.
Disadvantage: It would take a long time to see decent profits.
Option 5: Buy gold and silver
USD and EUR do not look good in the future and money will flock to gold and silver. This would push the gold and silver prices even higher.
Advantage: Enjoy the bullish run in gold and silver.
Disadvantage: It is quite expensive now and better to wait for pullbacks. Gold and silver prices may reach a state of euphoria and collapse.
What should I do? I am looking at both Option 2 and 4 at the moment given the current circumstances. I expect the market to rebound a little following the big drop last week. It would be an opportunity to sell. I have silver holdings in ETF and UOB, and I do not intend to add more at this moment. Let’s see what the market will do next.