How to Profit from the Market Carnage

This might not be the right time to be in the stock market as the ups and downs – some days, over 10 percent – can give even the most seasoned investors fit. But as the saying goes, when there is blood in the water, the sharks come out. As such, today’s investors (regardless of experience) need to be thinking about how they can profit from the market carnage.

2020 has been a crazy year. If you look at the year-to-date chart of the S&P 500 ($SPX and not the ETF, $SPY), then you will see that the broad market is down more than 20 percent though it was less than a month ago when the market hit all-time highs. The stock market had gone into overdrive last October, and it appeared there was no end in sight to the bull market.

Then came COVID-19, the oil price war, economic shutdowns, massive layoffs, and panic. With all this happening at the same time, it highlights the need to keep your cool will investing. Part of this includes following the “Three-Day Rule.”

What is the rule, you ask? The “Smart Money,” institutional investors, and hedge funds are usually the first to get out of the market. They are the ones starting the sell-off because their trading models have told them now is the time to head for the exit.

Then comes day two when the laggards jump on the bandwagon. These might not be the market movers, but they are big players in the market. As such, they’ve had 24-hours to reassess the market and determine they don’t know what is going on, so they decide the best move is to sell as much as they can at the open.

At this point, the only investors left in the market are the retail investors. These folks are usually the last to get out of the market. Instead of panicking, it might make sense for these investors to look at the long-term picture and not panic.  While there is some validity to this, it is often hard to know how to tell if “this time is different”  – at least in the heat of the moment.

Well, this time, it is. In a year, the market might be reaching all-time highs again. But today the volatility is almost unbearable, and for millions of Americans (and those from other countries) nearing retirement, the prospect of losing their life’s savings in a stock market akin to riding a bull at the rodeo might be too much to handle.

However, you shouldn’t panic sell. Instead, look at your portfolio and decide what is the best move as some stocks might gain from the uncertainty, while others will get hammered. 

Also, don’t buy into the “dollar-cost averaging” talk – at least for now. Even the most experienced investors can’t call the bottom, so you should also try.  Instead, look for shelter in the storm and try to ride it out as best as possible.

Use this time to look at your allocations and your risk tolerance and then figure out the right way forward. Also, start to look at other alternatives not only to protect your assets but to make sure you have enough cash available for what comes next.

One option might be to consider a reverse mortgage. Don’t use this cash to invest as that would be doubling down at a point when you know when to walk away. Instead, use the program to eliminate your mortgage payment and to free up the equity you’ve built up in your home. 

Again, don’t spend this money. But if the market is turning, real estate values are sure to follow. As such, a strategy to access what cash you can at little to no cost will give you peace of mind in the days ahead.

You do want to keep in mind that the program has gone there some changes in recent years, and while this was meant to protect borrowers, it might mean that you can’t access as much of your home’s equity as you could before. 

According to All Reverse Mortgage, “the amount borrowers receive is determined by the HUD calculations based on the age of the borrowers (most specifically the age of the youngest borrower), the value of the home or the HUD lending limit, whichever is less and the interest rates in effect at the time.”

Remember, the goal here is to shield the equity you’ve built up in your home from the whims of the market while reducing your debt service.

Now to the silver lining. It would appear governments have learned from some of the mistakes it made during the previous recession. This includes trying to get cash into people’s hands as quickly as possible. 

While this should provide some relief in the short-term, it is not without risk as there is an element of the current crisis, which points to simultaneous supply and demand shocks – this is unprecedented.

Just because the market is being whipsawed back and forth doesn’t mean you need to lose everything. The best way to profit from the market carnage is to first reflect on where you are and where you want to go and then to take decisive action.  

Don’t gamble! 

Instead, look for opportunities that protect your portfolio while maximizing the upside.  Then accept smaller incremental gains to reduce your exposure. In this way, you can profit from the market carnage.

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