In February, financial markets experienced a historic liquidation that paralleled the onset of the COVID-19 coronavirus pandemic. Alongside the introduction of global lockdowns, brokerage account openings rose rapidly as sheltered market participants searched for ways to maintain engagement with the outside world.
With commissions nonexistent at most major brokers, retail investors are taking control over their portfolios, hungry for stability, and higher returns.
Here are some tips for achieving consistent returns in a market dominated by two-sided volatility.
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Tip 1: Identify The Trend
On May 19, Jim Cramer sought advice from technician Carolyn Boroden, founder at FibonacciQueen.com, and contributor to RealMoney.com. Boroden is a technical trader, using the Fibonacci methodology to predict price movements.
Based on Boroden’s take, the S&P 500 Index (SPX) is at a critical juncture.
“The charts, as interpreted by Carolyn Boroden, suggest that the major averages are still in rally mode,” Cramer said, “but it’s a precarious rally where you need to proceed with caution if we fail to break out from these levels and slip back to where we were not that long ago.”
A rally and acceptance of prices above the 200-day simple moving average would be confirmation for further upside.
“She thinks the S&P is a buy right here. There’s too much going right in her charts for her to say anything else,” Cramer said. “However, she says you should be ready to sell if we fail to break out over the 200-day moving average, eventually.”
If the rally is sustained, Boroden’s S&P 500 targets include $3,720 and $4,136.
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Tip 2: Find An Investment
Despite the economy’s turn, past crises marked the onset of lasting innovation and growth.
“During the worst financial crisis of our lifetime, innovation gained more traction than most investors had anticipated. Companies offering faster, cheaper, more cost-effective, and creative products/services gained a significant share,” said Catherine Wood, the CEO and CIO of ARK Investment Management LLC.
For example, technology and online retail won big during the 2007-2009 financial crisis.
“During its worst quarter, Salesforce chalked up a 20% increase in revenues. At the same time, while retail sales were falling, Amazon delivered 14% growth during its worst quarter.”
At the 2019 Forbes’ 30 Under 30 Summit in Detroit, Wood suggested mainstream narrative surrounding job security, technology, and the innovation is unsubstantiated and suggested investors find value in the five emerging innovation platforms:
- DNA sequencing.
- Collaborative robots.
- Energy storage, such as electric and autonomous vehicles.
- Artificial intelligence.
- Blockchain technology.
Wood said she filters through those platforms for the presence of the following:
- Broad-based innovation that cuts through global economic sectors.
- A declining cost curve.
- A launching pad for further innovation.
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Tip 3: Execute The Trade
In light of the increased trading activity, Jerremy Alexander Newsome, founder, and CEO at Real Life Trading, a trading community, and education platform, shared his perspective on how traders can best position their portfolios for longer-term growth.
Traders need to follow three steps, he said:
- Understand the importance of investing in your future.
- Define what you’re willing to risk.
- Adopt a strategy and trading plan.
“It’s really important to understand why you need to invest,” the CEO said. “Wealth is something that takes time to acquire. Starting early and remaining consistent is the key to early financial independence.”
Newsome suggested investors leverage short-options to reduce cost-basis and portfolio volatility.
“With the volatility, it’s easy to get shaken out. You can use options to smooth returns and collect extra cash, while you build a long-term position in the market.”
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The basic strategy involves the following steps:
- Pick a stock.
- Buy at least 100 shares.
- Sell 1 call per 100 shares of stock owned.
Implementing this strategy on Pinterest Inc (PINS), for example, would result in the purchase of 100 shares of stock — something that would cost an investor $1,869 at market close on May 21 — and the sale of 1 call, such as the 24 strike call, after which the investor would receive $30.
“When you do this strategy, the credit you receive is yours to keep. No one will take that from you. All you have to do is hold the stock until the option expires. If the stock crosses the strike price of your option, you will be sold out of your stock position, and you’ll keep the profits.”
In the example above, if the position was held till expiration, and the stock crossed the strike price, a maximum profit of $561 would be realized (the difference between the initial stock price and the strike price, plus the credit received). The max loss, on the other hand, is limited to $1,839 (the amount paid for the shares less the credit received).
“You do this if you don’t mind owning stock in the company,” Newsome said. “It’s something you can repeat many times, and it will help you lower the cost of ownership.”
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