Stock Market Volatility Has Risen Sharply – So Be Careful

The Stock Market volatility has increased sharply over the last few months according to the report from Fidelity Investments Research Group. Download their report High Volatility Bad for Stocks and read it.

I am writing this post because I am aware many Baby Boomers may be looking to trade the stock market in retirement. If you are doing it for fun and profit with money you can afford to lose then enjoy. Volatile Markets provide Chart from Fidelity Investments Reportopportunities for great profits if you are good at trading and large loses if you are not. With money you can afford to lose it can be fun too 🙂

But if a you are trading to try and increase your Nest Egg this is gambling and is a high risk game. Just look at the number of trading days for the S&P 500 that exceeded 1% in so far in 2008. Then look at the number that were green and negative days. If this doesn’t make you think seriously about trading the markets or not then I don’t know what will.

I see many web sites advertising how easy it is to trade. I did it for over 10 years and I can tell you it is not easy. It is hard and time consuming to even learn the basics of good money management.

Also regardless of what the large fund managers tell you about staying in the market for the long term, the professionals fund managers are the ones who move the market up or down. On Friday they voted with their feet. Elvis left the building and so did many of the professional fund managers, leaving the market down significantly.

The professional fund managers are trading like never before because this is a big opportunity for them to make big profits by the shear size of their positions. They are taking big risks because they need to get some profits back into their funds to prevent the dreaded redemptions when investors see their losses. You may not be aware of this but they are paid bonuses on the size of the funds under management NOT how much profit they make. If you can trade with them you will profit. But if you get in their way you won’t know what hit you.

On Thursday the market moved up substantially and everything in the garden was lovely. But on Friday professional fund manager sentiment was to take the money and run. if you were caught in that you would have lost a bunch of money.

Which leads me onto my next point. Using Stop Losses. I’ve said on this Blog if you wish to invest (or trade) in the stock market you should always use stop losses. Unfortunately in highly volatile markets many Buy and Hold merchants will tell you how stupid you are to use stop losses when the market moves so violently against you. But being stopped out is all part of the investment process. The market is telling you either your stops are too close, or you should not be trading or investing at all in that market. Listen to what it is telling you. Cash is a position.

If you are a professional trader or investor as opposed to a professional fund manager, you will almost certainly change your trading style to accommodate the increased volatility or you will stand aside. Knowing when to do this is what makes a professional trader or investor successful. They never fight the market.

I read a study once where men sometimes take on more risk after 50. They often start Forex Trading, CFD, Futures or Options trading. It’s be likened to their Everest. Failure rates are 95% plus. But it’s not failing that is the problem. It is how much you lose that counts.

When I traded CFD’s on 1-3% leverage for 18 months I lost about $11,000. It may seem a lot but it was also my hobby. People who race cars spend more than that rebuilding an engine. It was my Everest. But I stopped it when I went into semi-retirement. (See my About page for more information)

For those that don’t know 1% leverage is holding a $300,000 position with just $3,000 and I’d sleep at night because I managed my trades, always used stop losses and knew exactly what my positions were at the end of the trading day.

Unless you are prepared to do that don’t even think of trading the stock market and NEVER do it with your Retirement Nest Egg.

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