Micro Blog #27: How I'm Managing Market Volatility and Impending Macro Risks

So far, April has brought us quite a bit of market volatility. A continuation of the nightmare that started on February the 5th when DOW plunged almost 1600 points -- easily the biggest point decline in history during a trading day.

As we know now, it was no dip and market was merely giving us a big jolt to announce an era of high volatility.

Is return of market volatility an end to the 9 year bull run?

Since that epic fall, the market has increasingly become more volatile -- down 400 points one day, and up 300 points the next day, and on and on. Is this a precursor to something more cynical? Like a major correction or even worse a bear market or an outright recession?

I would be the last person to know when recession is coming, but I can tell you what I think is causing all this volatility:

It is the four risk factors: trade war, global geopolitical risks, US political risks, and fed's hawkish interest rate hikes.

All of these factors combined with lightning-fast flow of breaking news and hawkish tweets from powerful people can bring us the next black swan event which could send the market down another 20% or even outright turn it into a bear market. This is just based on my intuition and not on any economic data that I can show you.

As they say investing is more art than science, so one has to listen to their gut or intuition when making investment decisions and keep an eye open for impending risks on the horizon. When it comes to investing, I trust intuition more than data.

So what an investor like myself got to do?

As the macro risk increases and market gets increasingly volatile, I would adjust my tactics to meet the current market risk profile, while still meeting my investment objectives of continuing to grow investment income in the form of dividends, while only holding quality assets.

Changing My Investment Tactics

As of the start of April (Q2), I've suspended my "Next-Man-Up" stock buying tactic and switched to a "hold and accumulate cash" tactic. You can read about my investment tactics here. My reasons for the change in tactics are as follows:

1. The 9 year bull market finally seems to be running out of steam, and the barrage of existing and incoming risks across the four factors is making market very nervous and jittery. All it would take is any one of these black swan events to fully materialize, and the market could go bearish in a matter of days, if not overnight. Especially, given how rapidly such events can get out of control in the age of instant information flow and fake news.

2. I'm low on investible cash and would like to have some more cash set aside to take advantage when bears come growling. I could raise cash by selling into gains as I've several stock positions that have appreciated significantly. But almost all of my stocks are blue chip high quality companies that I would hate to sell or trim now, and having to buy them again at likely a higher price later (if a significant correction never comes) not to mention the tax liability keeps me from selling shares at this time. Therefore, my preferred method for raising cash is simply to hold dividends and re-invest them at an appropriate time rather than right away as I've been doing. Sure it could take a few months to get to a sizable dividend cash hold, but that may be a good thing as patience is needed in the time of uncertainty to avoid knee-jerk decisions.

3. I'm in no hurry to increase my dividend income at the moment as I've already met 60% of my dividend growth target for the year and expect the rest of the increase to happen organically from the dividend increases, even if I don't buy a single share of stock. I still have more than half of my companies that are due a dividend increase for the year. Therefore, I'm on track and somewhat ahead of the trajectory of achieving 10% annual dividend increase.

4. Cash is king! I hold high quality companies that pay me nice amounts of cash every quarter, so no need to sell any assets regardless of what market or stock price does. I would just sit back and enjoy the ride while collecting dividends and building a nice cash position that I can deploy when I see appropriate or when any of the black swan events materialize.

5. If none of the macro risks materialize by the end of this quarter, I would reassess the risks for the next quarter and make any adjustments to my tactics. This could mean deploying the accumulated cash to buy more shares of existing/new companies or continue to hold and accumulate cash.

Conclusion

So that's my plan for the next 3-4 months, to hold and accumulate cash while maintaining current level of investment. I don't know for sure if and when exactly any of the macro risks will materialize, but jitteriness of the market is sending us signals of impending risks, and seemingly endless hawkish views from all sides is not helping. All it may take is a single black swan event to send the market rolling down into a bear territory.

When the risks subside to normal levels and blue sky re-emerges, I would be happy to redeploy the accumulated cash into new shares. Till than, I'm staying on the sidelines.

What's your plan to handle the current market volatility and macro risks?

Disclaimer: I'm no investment expert, so don't take anything I write as an investment advice. Always consult a professional adviser or do your own due diligence before investing.

Comments

  1. Enjoyed reading your strategy. I've been nibbling here and there on down days with my brokerage account. Automatically plowing money in monthly to the retirement accounts. Still a little uneasy as to the volatility lately. Just got so use to every day being in the green haha. I've got cash waiting for a big dip again.

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    1. Thanks DS. Yup, most people got used to market going up and up. Now, the narrative has changed and market is getting more volatile, the weaker hands will likely exit.

      Good to have some cash on the side as likely more and bigger dips to come.

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  2. Hello Mr. ATM,
    Over the past 18 months, I have been more on the sidelines letting cash accumulate and letting my existing holdings run higher. And, adding to existing positions occasionally as they meet my requirements.

    If the market continues higher from here, I will continue with that strategy. If it goes lower I will likely buy a little more aggressively.

    It's kind of my buy lower never sell philosophy. Twisted to mean buy a little less higher, buy a little more lower and plan to never sell collecting the dividends into perpetuity. Tom

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    1. I have a similar policy but I do sell if I see an increase in a company specific risk. It has saved me from dividend cuts and loss of principal. Though, anytime I've sold a stock due to overvaluation, I have mostly regretted it. So, nowadays, I let my winners run as high as they want till they no longer meet my minimum current yield requirement, at that time I would reinvest the proceeds into a higher yielding stock; thus increasing my income.




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  3. Not a bad strategy Mr. ATM, but for me, I'm actually not doing anything that different. I'm still maintaining my current level of contributions to my dividend portfolio. When I have cash, I immediately invest it in the market, regardless of whether it's up, down or sideways and irrespective of how volatile it is. I'm taking the lazy approach to investing and figure that the short term gyrations of the market today won't impact me too much 16 years from now when I'm looking to retire.

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    1. That's a fine strategy too and I've been doing that through out the bull market. But now, it seems we may be at the cusp of an end of a bull market. Whenever the market narrative changes, I like to take a pause and figure out whether I need to change my investment tactics or not. I think I'm at that junction right now where I need to take a pause and give some time to the market to let it figure out where it wants to go.

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  4. Interesting change of tactics. For now I'm still buying monthly and hopefully taking the right advantages of the volatility. I do have some additional cash (bonus!) coming in so maybe I'll hold that or just spurge it as well :)

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    1. Sounds good. Do what makes you comfortable and meets your risk vs. reward profile.

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  5. Cash is king. Nothing wrong with having some available if needed. No reason to buy just to buy. I am attempting to build up cash, but that is more so for my next tuition payment. I am using my invest-able cash to finish maxing out my Roth. I would prefer to max it out sooner than later in the year so it can take advantage of the compounding even more. Especially since the contribution limit is not too incredibly high on those.

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    1. I like the idea of front loading your Roth to maximize compounding. I tend to do that too when I was getting a paycheck. Max out retirement accounts first and then put the access money into taxable investments.

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  6. I agree that buying stocks now for the long term is not the good idea. If you're a buy and hold investor, you will lose a lot of money when the next bear market begins.

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    1. Troy,

      I consider myself a buy and hold investor and I never lose a dime if I don't sell my shares and the companies I own don't go bankrupt. This is why I pay attention to quality when buying a company more than anything else.

      However, I do pay attention to what market is doing and I like to take advantage of bearish sentiments whenever possible to pick up high quality stocks (i.e big fish) at bargain prices with higher than normal yields. It's like fishing, sometimes you have to wait for a long time for a big fish to bite into your hook.

      At the end, yield is all I really care about when it comes to getting a return. Capital gains are simply a means to earn more dividends for me, I would harvest them to a degree as needed to meet my dividend target and without causing a big tax liability.

      So right now, I'm just taking a little vacation and chilling on the sidelines waiting for the big fish (e.g. JNJ at 3% yield). As a dividend investor, I still get paid for chill'n. Ha!

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