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As a bit of background information, I'm a Canadian novice investor. I've dealt mostly in stocks and have done pretty well in the past year (+25%).

I'm concerned about market volatility once the US presidential race gets into full swing, especially election day itself. My gut tells me that the markets will stay pretty much steady if one candidate is elected and will swing wildly if the other is elected.

Politics aside, what is a conservative position to take if you are concerned about some event (Brexit, Greece bankruptcy, Scottish separation referendum, etc) making markets volatile?

I'm thinking about just selling everything in August and re-entering the market after the election either when the market is steady (at a couple of month opportunity cost) or when panic selling occurs. Is this a sane line of reasoning?

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    What kind of investor are you? Long term? Short term? Do you short frequently, or hold exclusively or nearly so long positions? Is this investing with your 'current money' or with retirement account type money? What size of portfolio? – Joe Jul 6 '16 at 19:03
  • @Joe Mixed long and short term, exclusively long positions. I have some investments that I've held since the first day I bought anything a year ago, I have about 5% of my portfolio that I regularly turn over <$1 stocks in the 1-3 week time frame. My portfolio is sitting around $12,500. My retirement is handled separately, this is my rainy day fund. – Myles Jul 6 '16 at 20:16
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    There's a described "October effect" so waiting until November isn't necessarily wrong. businessinsider.com/… – user662852 Jul 6 '16 at 20:27
  • Note that short-term volatility can almost be ignored in long term investing -- you just diversify so short-term things tend to go in opposite directions to smooth out some of the bumps (eg by owning a mix of stocks and bonds), let it cook, and rebalance occasionally. – keshlam Jul 7 '16 at 2:50
  • if I'm not mistaken, aren't plain trading questions not really on-topic for this site? – Fattie Jul 7 '16 at 14:18
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If you're worried about volatility, and you're in mostly long positions, you should be looking to diversify your portfolio (meaning, buying some stocks that will do better in a bear market) if it's not already diverse, but you shouldn't be looking to abandon your positions, unless you anticipate a short-term need for cash.

Other than that, you may want to hold off on the short-term positions for a while if you're concerned about volatility, though many traders see volatility as a great time to make money (as there is more movement, there's more opportunity to make money from mispriced stocks in both directions). Unless you think the market will be permanently down due to these reasons, anyway, but I don't see any reason to believe that yet. Even World War Two wasn't enough to permanently hurt the market, after all!

Remember that everyone in the market knows what you do. If there were a sure thing that the market was going to crash, it already would have. Conservative positions tend to involve holding onto a well diversified portfolio rather than simply holding onto cash, unless the investor is very conservative (in which case the portfolio should be cash anyway).

The fact that you say this is your rainy day fund does make me a little curious, though; typically rainy day funds are better in cash (and not invested) since you might hit that rainy day and need cash quickly (in which case you could take significant losses if the time isn't right).

  • Sorry a whole lot of follow up to this answer: What are some examples of industries that do better in a bear market? How would I diversify without abandoning positions? How would I take advantage of volatility without abandoning positions? – Myles Jul 6 '16 at 21:18
  • With respect to the liquidity of my rainy day fund, I try to hold a diverse portfolio so the odds of it being a bad time to get rid of anything seems pretty low. – Myles Jul 6 '16 at 21:20
  • You'd certainly need to sell some of your long positions in part or in whole to diversify (if you're not already diversified), but you wouldn't need to abandon your holdings and simply hold cash. As for what does better in a bear market? That's really a different question (and one we've had here before I think, search about I would say). – Joe Jul 6 '16 at 21:21
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    As for taking advantage of volatility - well, yes, that implies selling some as well; how you'd do that depends on the volatility. More volatility implies more opportunities for you to identify mispriced stocks, so you find mispriced-high ones that you own and mispriced-low ones you don't own, and swap. – Joe Jul 6 '16 at 21:22
  • And for your rainy day fund diversification: If you're already diversified so that you own stocks likely to do well in a bear market, then you're already there :) If you are diversified in terms of owning different sectors, the concern is 2008 happening: the time when you're most likely to need your rainy day fund (job loss, home risking foreclosure, etc.) is also when the broader market is more likely to be down across most sectors. If you have some holdings in bonds/etc., then you're somewhat protected there (but not entirely!) – Joe Jul 6 '16 at 21:23
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If you are worried about an increase in volatility, then go long volatility. Volatility itself can be traded.

Here in the US there is an index VIX that is described as tracking volatility. What VIX actually tracks is the premium of S&P 500 options, which become more expensive when traders want to hedge against volatility. In the US you can trade VIX options or invest in VIX tracking ETFs like VXX.

Apparently there are similar ETFs listed in Canada, such as HUV.

Volatility itself is quite volatile so it is possible that a small volatility long position would cover the losses of a larger long position in stocks.

If you do choose to invest in a volatility ETF, be aware that they experience quite a lot of decay. You will not want to hold it for very long.

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    "Volatility itself is quite volatile" derivatives in a nutshell, I love it. – quid Jul 6 '16 at 21:34
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    I think the ease of hedging with volatility ETFs is probably actually contributing to increased market volatility lately. Leads to more dramatic rebounds as people unload their volatility positions. I had a volatility long overnight for Brexit and at one point it was up over 130%, but by the time the US market opened it had dropped to like a 35% gain. – Comptonburger Jul 6 '16 at 21:38
  • You may wish to edit your post. The Toronto VIX ETF is "HVU", not "HUV", and it is a leveraged 2-times ETF. – Nick R Jul 6 '16 at 21:47
  • The ETF I located actually is HUV and also tracks S&P 500 options which may be appropriate as the asker is referring to US events. horizonsetfs.com/ETF/HUV – Comptonburger Jul 6 '16 at 21:48
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    Sorry, you're right. The HUV is the unleveraged version. I've only ever traded the leveraged HVU – Nick R Jul 6 '16 at 21:49
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If you are worried about elections think about writing some calls against your long positions to help hedge.

If you have MSFT (@ $51.38 right now) you could write a MSFT Call for lets say $55.

You can bank $170 per 100 shares (let's say you write it at 1.70) (MSFT 01/20/2017 55.00 C 1.73 +0.01 Bid: 1.69 Ask: 1.77)

If MSFT goes down a lot you will have lost $170 less per 100 shares than you would have because you wrote an option for $170. You will in fact be break even if the stock falls to 49.68 on the Jan Strike Date.

If MSFT goes up $3.50 you will have made $170 and still have your MSFT stock for a net gain of $520. $170 in cash for the premium and your stock is now worth $350 more.

If MSFT goes up $3.62 or more you will have made the max $530ish and have no MSFT left potentially losing additional profit if the stock goes up like gang busters.

So is it worth it for you to get $170 in cash now and risk the stock going up more than $5 between now and Jan. That is the decision to make here.

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