The broad markets have taken on a negative tone and sentiment over the last two weeks of trading. A look at the charts for most investors isn’t alarming, but they are concerning. The volatility index has picked up intraday and the VIX has moved higher and a break above the 21-23 level would show more fear from investors short term. This presents the challenge of managing the current risk in our portfolios as investors or traders. From a longer term perspective (weekly charts) the market is pulling back, but not changing trends. The short term perspective is a sideways trading range that is approaching the key support level of 1340 on the S&P 500 index. This creates a bigger dilemma today as more investors are also traders. In other words, we have both time horizon positions in our portfolios and that creates an inner conflict of how to manage our money.
Position management is the answer and it allows you to maintain your logical progression to managing both your overall portfolio and the positions that make up your portfolio. Thus, money management should take on two goals versus one. First, portfolio management is where you determine what your overall objective is for your money. Example, my personal goal is to make 1% per month and control risk (don’t lose money!). That is big picture of how I manage my money and risk overall. The second, position management is breaking down the objective of the each position or each account that makes up my portfolio. Example, my IRA account is managed with a long term time horizon based on my age and my goals for that specific account. My lifestyle account is managed with a short term time horizon of 3-9 months to accomplish my short term goals relative to my lifestyle. Thus, you can break your time frames by account or another approach is to do so by position regardless of account. The key is define how you will approach this methodology before you invest. Understand your personality, focus on what works best for you! The key is accomplish YOUR financial goals not someone else’s.
Back to the market and what we face heading into this week of trading. Economic data is minimal, earnings have become minimal, and the news has taken on a leadership role. That is never a good combination for the markets overall. Remember the market is you and I as investors, not a real entity. Investors left to decision making on news events is not good short term for the overall results. Thus, we have to be aware of our time frame and risk tolerance relative to goal of each position in our portfolio.
First, a break of 1340 support on the S&P 500 index equates to downside risk of approximately 60 points to the next support levels. If we are looking at short term positions the risk exposure is approximately 4.5%. That is significant in my perspective to that time frame. If we are looking longer term, that is tolerable relative to the time horizon. Here is the challenge with what I just stated… If we knew the maximum risk levels and we could be assured it wouldn’t get any worse than that we would hold our positions and live through the volatility. But, as you know there are no guarantees in investing. Thus, the fear level rises. Fear is an emotion and emotion transferred into logical decision making processes never goes well. If is magnified if we have to make the decision when the market is moving lower as we are attempting to make the decision. Thus, we need to make the decision now how we will treat each position. Set your stops accordingly and move forward.
Second, a bounce off support and back towards the top end of the current trading range. 1390 would be the first resistance level on the S&P 500 index or approximately 40 points currently. The upside push could be approximately 3%. How would you approach that move relative to your portfolio. If your belief is the market will fall further in the near term, the bounce would be used to lessen your exposure to stocks in your portfolio. The bounce would create a Watch List for short candidates to trade as the bounce reaches resistance. It is important to have a plan of action now not when it happens. Attempting to add positions when the event expected is taking place than to plan in advance and set up your trades accordingly.
Money Management is about implementing a strategy to capture your beliefs relative to market direction, short term or long term. The challenge for most investors is we react to the markets activity versus being proactive to our beliefs. Develop a discipline strategy for managing your beliefs based on your personality of investing. Anything less will make a neurotic investor or trader.