To begin: I am not telling you what to do. I am not responsible for any action you take. I am telling you what I do. If you choose to do the same thing, that is your decision. I am not responsible for your decisions.
Economic cycles ensure a rise and fall in the overall stock market. Timing these is pointless. You will have almost 0% chance of catching the bottom or calling the top of the market. Yet, if you set yourself price-points at which to take action, you can achieve powerful returns without too much stress. Buying the market when it is on sale, then selling it when it’s above where it belongs, is profitable.
A simple set of strategies exists to wait for the market to hit a price-point at which you are comfortable to own a piece of its growth, and to sell a piece of its future loss. You don’t have to do both things. Doing both can try your patience beyond any comfort level. Doing one alone (buying for the rise) can be thrilling. Doing both can accentuate returns.
I’ll walk you through different options from the easiest to the most stressful. You are invited to ignore any of these or find the option which works best for you. Again, I’m not telling you what to do, I’m telling you what I have done, and will be doing in the future because it works for me.
Option 1 – Easy on the Heart
This is the simplest way to profit off market volatility: Regularly buy a Total Stock Market Fund (e.g. VTI Vanguard Total Stock Market Index). If you set-up an automatic purchase of this fund, say on a monthly basis, you’ll own a piece of the total stock market in the United States. In this way, when the price of the market goes up, you just keep buying it. When the price of the market goes down, you just keep buying it (and get more of it!).
Here is a set of scenarios to draw this out for you:
1. You invest $1,000 a month in VTI. It is currently trading at $299, so that gives you around 3.3 shares this month. The price stays the same. You keep buying every month. At the end of the year you have 40+ shares on your $12,000.
2. You invest $1000 a month in VTI. It is currently trading at $299, so that gives you around 3.3 shares this month. Next month the price drops by 30% to $209, which allows you to buy 4.78 shares. (Notice, you would get more shares because the price of the share is on sale. Yeah!!!) The price stays down for the remainder of the year. You are able to own 55 shares by the end of 1 year. (Buying something on sale is great for long-term ownership and you did nothing different to earn these extra shares.)
3. You invest $1000 a month in VTI. It is currently trading at $299, so that gives you around 3.3 shares this month. Next month the price skyrockets 30% to $388, which allows you to buy around 2.5 shares. Since the price went up, the fund is selling at a premium, so you can buy fewer shares with the same regular investment.
Over the course of several years you will see the market fall and rise. You simply keep buying, which allows you to buy the discounts. This takes no thought on your part, creates no stress, and is the simplest way to build long-term wealth. Keep this up for as long as you invest, and live comfortably when you are done. Simple and stress free.
Option 2 – Buy the discounts, hold the falls.
This is an option for someone who can take a little volatility, but would prefer not to take too much risk. In this case one holds a money market fund, cash, or a simple bond fund (e.g. VND Vanguard Total Bond Market Fund) while you wait for a discount opportunity to arise. You watch UPRO (Pro Shares UltraPro S&P 500 ETF) regularly, waiting for it to go on sale. It will go on sale.
Note: UPRO is an exchange traded fund which returns 3X the market growth for a day. Every day the fund goes up, or down, by 3X of the market. As the market is a constantly rising machine over the long-term (think 20 year periods) this fund will always come out up, by 3X from the market as a whole.
The price of UPRO has ranged, in my investing career, from $1 to its current $96. During an economic downturn it falls below $30, and occasionally has gone all the way back down to $14.
In this option, simply mark a point at which you are comfortable, probably between $10 - $30 at which you would like to buy this fund. Then, you sit. You sit. And, you sit. In time the fund will rise, going above $70. In the range between $70 - $85 you start to sell off your holdings, moving your money back into a more conservative investment.
Rinse, and repeat over the course of 30 years and you’ll find you’ve earned a lot on market growth.
Option 3 – Buy the discounts, short the peaks.
This option is for those with hearts of steel, nerves which don’t feel, and the patience of a bear in hibernation. I do not recommend this option to anyone. I have done this once and it almost caused me a heart attack. This is what I did:
In 2017 I knew the United States would struggle economically from a decision by its then President. I was not sure what specifically that decision would be, but knowing his way of making decisions, I knew he'd make some bad ones. At the time I speculated (note: this is not an investment) approx. 30% of my net worth in the SPXU ProShares UltraPro Short S&P500
In 2020 this speculation paid off. I then switched it to UPRO ProShares UltraPro S&P500 which also paid off. I sold this back in 2022.
The idea here is that you short the market when it is selling at a premium before buying the market back when its selling at a discount. To do this, one must set a strategy ahead of time and stick with that strategy. There will be times when the nerves fray, the patience wanes, and anxiety rises to a fever pitch. Stick with the strategy and you’ll make it through. Second guess yourself, and you’ll lose everything.
A scenario which works:
When UPRO is trading above $85 begin buying SPXU. Convert 10% of your portfolio of UPRO to SPXU every week until you’re 100% in SPXU. This should take 10 weeks. Then, SIT! SIT! Go on holiday. Go away. The market will go down by a lot eventually. It always does. It will take longer than you expect. It will be uncomfortable. Don’t look at your losses as you short a market you know will eventually fall. It will eventually fall.
During the fall, UPRO will hit $30, and may begin going below that. Begin converting back into UPRO at 25% a week. This will take 4 weeks. Now, SIT! SIT! Wait for UPRO to go back above $85 again.
Rinse and Repeat. Each time you start over, take 50% of the new funds off the table, putting them back into something like VND. This is your DON’T TOUCH THIS POT, which as the name implies, is your long-term nest-egg. Never put this money into play again, as it is your winnings. This will be your dividend income pot for the future.
This option shorted the market when the price was high and bought when the price was discounted. There was no attempt to time the high or low, but simply take advantage of the sale which was being offered.
Learning
We can run away from facts for a time, but facts have a way of catching up eventually. Markets rise and fall. If you know that, and know yourself, then you can use who you are to benefit from those fluctuations. Know your level of risk tolerance and patience. At the right level for you there are options on how you can ride the market up, own a lot of it, and ride it down again, buying more of it when it goes on sale.