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Ways To Trade And Minimize Risk During Volatile Markets

Click to enlarge One of the qualities that can make investing in the stock market so exciting is how fast it moves and reacts. Prices are constantly changing, making it a challenge to keep up with what’s going on unless you’re sitting in front of a trading monitor. As a result, you might feel nervous about when to place trades, especially in uncertain market conditions. The good news is there are several easy steps you can take to better navigate your trading decisions during volatile markets. Here’s a look at some of the risks of volatile markets and a few ways to help you minimize losses. Risks Of Volatile Markets How much volatile markets may affect you can depend on the types of assets you hold, the total amount of money you have invested, and how you react to changes in the market. For instance, if you have highly concentrated positions, you are bound to face larger gains or losses due to having a high-risk portfolio. Some examples of risks that investors can be exposed to during volatile markets are listed below: Being over-concentrated in single-name stocks, specific sectors, or risky investment styles could lead to larger percentage declines in your portfolio versus major indices such as the S&P 500. Focusing too much on the short-term and holding excess cash could lead you to lose purchasing power due to inflation and under-utilize strategic trading approaches such as dollar cost averaging to methodically leg into investments on a regular basis. Emotions can be hard to control when you start to see red everywhere. Panic selling when a stock price temporarily declines on a sound investment could derail your long-term investment goals. On the other hand, if a company is failing and its stock price starts to decline rapidly, failing to lock in some of your profits or cut your losses could be quite costly. Getting too distracted by losses on your existing positions could also cause you to overlook favorable buying opportunities that could help you gain exposure to quality names trading at depressed levels before a rebound. Bring Your Asset Allocation Back In Line When the markets seem more unpredictable than ever, it’s a good idea to take a quick look at your portfolio’s asset allocation. Due to fluctuations in the markets, it’s possible your positions may have shifted out of line with your target ratios. For example, your stock-to-bond ratio may have shifted from a 60/40 split to a 50/50 split. Consider the benefits of rebalancing to help your long-term investment goals stay on track. It’s also worth checking if you are heavily overweight in any one area of the market. Concentration risk tends to rise in volatile markets. Reevaluate concentrated trading strategies such as those heavily weighted in single-name stocks or individual sectors. Dollar Cost Averaging DCA, or dollar cost averaging, in an investment method that involves investing a fixed amount of money in an asset on a consistent basis over time. It can be useful for investors who would otherwise choose not to invest at all or who are unsure about how to determine entry points into a stock or ETF. If you want to avoid having too much cash on hand, regularly investing a set amount of money into the markets on a monthly or biweekly basis can help you stay active, deploy cash, and avoid feeling like you’re missing out. Sell Stop Orders Do you want to protect your gains on a profitable position or limit your losses on a particular holding in today’s volatile markets? One common trading strategy many investors use is to place sell stop orders, otherwise known as stop loss orders. What a sell stop order does is it places an order to sell shares of a stock when its price reaches a “stop” price that you indicate in the order within a specified time frame. The stop price must also be lower than the current stock price to be valid. It helps to understand how a sell stop order works with this example: Travis owns 1,000 shares of Stock A. It’s currently trading at $100 per share. He has done well on his position and wants to lock in some profits if the stock price has a steep decline in the next couple months. Travis decides to place a sell stop order for 500 shares at a stop price of $90 for 60 days. If at any point during those 60 days Stock A drops in price to $90, Travis’ sell stop order will be triggered and a market order will be placed to liquidate his 500 shares. The actual execution price of the sell may not equal $90 exactly, but it should be pretty close depending on how quickly his broker is able to complete the trade. What if the stock price never drops to $90? The order would simply expire and Travis would be left with all 1,000 shares. The nice thing about a sell stop order is that you can set it and forget it during your designated time frame. No matter where you are or what you’re doing, you can rest assured that if your stock is on the decline and hits your stop price, your order to sell will be placed automatically. If you change your mind and no longer want to sell, you can simply cancel the trade if it hasn’t been filled before the order’s duration has expired. Buy Stop Orders A buy stop order has the same principles but in reverse. For example, if you are interested in buying shares of Stock A if it starts to show a rising trend in price, you can place a buy stop order. If the stock price reaches your stop price, your order to buy shares will be triggered at market. This can help you to make purchases before a stock price runs away and gets too high. Limit Orders Limit orders enable investors to purchase or sell a stock at a specific price (the limit price) or better. Let’s say Stock A is currently trading at $100. If you are willing to pay $99 or less to buy 1,000 shares of Stock A today, you could place a buy limit order with a limit price of $99. If your broker can meet or beat that limit price before the end of the trading day, your trade to purchase 1,000 shares will be triggered and executed. In other words, your execution price could be $99.00, $98.99, $98.95, etc. If the price stays above $99 the rest of the day, your order will expire. On the flip side, a sell limit order can only be executed at the actual limit price or higher. Stop Limit Orders Now that you are familiar with stop orders and limit orders, one step further is a stop limit order. In simple terms, a stop limit order is a combination of the two trade types and offers investors added precision. First, you designate a stop price, share quantity, and duration just like with a plain stop order. Next, you choose a limit price. The order will only be triggered if the stock price reaches the stop price and the order can be filled at the limit price or better.

Investors Should Sleep On Peru

By Jonathan Jones and Tom Lydon After several years of disappointing performances, Latin American equities are rebounding this year. While Brazil, the region’s largest economy, commands most of the attention, investors should sleep on Peru and the iShares MSCI All Peru Capped ETF (NYSEArca: EPU ) . Buoyed by higher commodities prices, EPU, the lone exchange-traded fund devoted to Peruvian stocks, is up 22% year to date, according to industry analyst ETF Trends . EPU is reflective of Peru’s status as a major miner of gold, silver and copper. The ETF devotes 46.4% of its weight to the materials sector and another 30.1% to financial services stocks. No other sector commands more than 8.8% of the ETF’s weight. Economic data is supportive of a bullish outlook on EPU and Peruvian stocks. “The latest data showed mining output slowed to 7.8% year over year, from a record high of 22.4% year over year in December, and construction, manufacturing and retail contracted by 2.7%, 3.9% and 2.6% year over year, respectively,” reports Dimitra DeFotis for Barron’s , citing Capital Economics data. EPU has come a long way from struggling amid lower gold and silver prices (Peru is a major producer of both metals) and wondering about Peru’s market classification. Index provider MSCI had previously warned that Peru was in danger of losing its emerging markets status and being demoted to the frontier markets designation. However, earlier this month, MSCI confirmed it is keeping Peru in the emerging markets group. The index provider did say that risks remain to Peru’s retention of emerging markets status. “MSCI warned earlier in mid-August that Peru could be downgraded to frontier market status as only three securities from the country had met the size and liquidity requirements for emerging market status,” according to Emerging Equity. “We still expect GDP growth to accelerate to around 3.7% in 2016, from 3.2% in 2015… it is too soon to worry about a renewed slowdown in growth in the first quarter of 2016. … Mining output is likely to rise further in 2016 as a number of copper mines expand production. What’s more, government spending is set to remain supportive as planned infrastructure projects continue to be implemented. We doubt the upcoming presidential election in April will change the outlook much, either, as all the leading candidates appear to be committed to continuing with the current government’s fairly orthodox economic policy,” said Capital Economics in a note posted by Barron’s. iShares MSCI All Peru Capped ETF Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

VBK: The Benefits Of Small-Cap Growth Stocks

By Jonathan Jones and Tom Lydon Stock-picking is difficult and plenty of data support that assertion. It can be said that the task is even more difficult with smaller stocks, explaining why so many active managers of small-cap funds lag their benchmarks. Over the one-year period, mid- and small-cap growth funds were especially poor performers, according to industry analyst ETF Trends . For instance, only 20% of all mid-cap growth funds outperformed the S&P MidCap 400 Growth Index, and investors paid an average 1.3% fee on mid-cap growth funds for the that underperformance as well. In comparison, mid-cap ETFs have an average expense ratio of 0.42%, according to XTF data. “On an equal-weighted basis, the average mid-cap growth fund returned -1.23% and lagged by 328 basis points in 2015, much higher than the expense ratio incurred,” Rosenbluth said. “This suggests to us that unwarranted stock selections contributed to underperformance.” Additionally, just 12% of all small-cap growth funds outperformed the S&P SmallCap 600 Index. Funds that track larger companies fared slightly better, with 51% of all large-cap growth funds outperforming the S&P 500 Growth index. The Vanguard Small-Cap Growth ETF (NYSEArca: VBK ) is a cost-effective option for investors looking for a passive approach to small-cap growth stocks. Compared to an actively managed small-cap fund, VBK is cheap. Well, compared to almost any fund, VBK is cheap as it charges just 0.09% per year, or $9 for every $10,000 invested. That is less expensive than 93% of rival funds, according to Vanguard . The $3.9 billion ETF holds over 700 stocks, nearly 22% of which are financial services names. Industrials and technology stocks combine for over 34% of VBK’s weight. VBK follows the CRSP US Small Cap Growth Index. “CRSP classifies growth securities using the following factors: future long-term growth in earnings per share (EPS), future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets,” according to a Seeking Alpha analysis of VBK. Cyclical stocks, like materials, industrials, energy and technology companies, are more economically sensitive and do well when the economy is improving. With the Federal Reserve set to hike rates, the rising rate environment would signal a better economic outlook. Cyclical sectors, which are heavily represented in VBK, currently trade at a discount to the broader market. In addition to its large combined weight to industrial and technology stocks, consumer discretionary names command over 15.5% of VBK’s weight. Vanguard Small-Cap Growth ETF Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.