Active trading strategies help investors ride bull, tame bear
To help investors decide how to handle the uncertainty of the current markets, Charles Schwab (SCHW) convened a panel on active trading strategies Tuesday morning at the NASDAQ Marketsite in New York. With many investors still holding a great deal of their money in low-interest money market accounts, the panel agreed that much of that money should be heading back into the market soon on the fear that investors won't want to miss out on what's left of the current bull market run.
The panel emphasized that active trading strategies could help investors hedge their losses and generate income in a down or sideways market if the current market rally does not continue.
Randy Frederick, director of trading and derivatives for Schwab, said that learning how to hedge positions in your portfolio is an essential part of investing, but what most investors are least familiar with. He noted that returns for the overall market over the last 10 years have been virtually zero, so, "You have to learn how to not just buy and hold, but how to buy and watch. You can't just buy and forget about it."
Frederick recommended using covered calls to protect the riskiest portion of your portfolio. But he cautioned that you must have sensible exit strategies when using options to make sure you keep your losses to a minimum. He also advised investing in exchange traded funds that can provide broad exposure to different sectors of the market without allowing your investment to go to zero if the market starts to slide.
Ron Baron, CEO and chief investment officer of the Baron Funds said having an active trading strategy involves putting in the research so you can buy stocks at bargain prices – stocks that are based on current trends or foreseeable business cycles are in position to rebound over time. "You have opportunities now to buy stocks at the cheapest prices in years," he said, estimating that some issues are selling at prices as much as 40 percent lower than they were last year.
Russell Investments' chief investment officer Erik Ristuben said investors should actively look to invest in areas that they may not have looked to before. Over the short term, he suggested selecting the highest quality stocks from the survivors in the financials, technology and consumer discretionary sectors for solid gains. But over the next ten years, Ristuben said investors should stop focusing on the U.S. market and actively look for investments globally. He pointed out that emerging market economies are likely to control a larger portion of the world's market capitalization going forward and growth rates of foreign countries are still significantly higher than that of the U.S.
"Every company everywhere in the world is competing on a global framework and you must begin to challenge some of your home-country biases," said Ristuben. "You've got to push yourself to look overseas more than you might be comfortable."
Finally, panelist, Brad Sorenson, director of sector research for Charles Schwab, said that actively trading on themes could help portfolio performance. Infrastructure plays, whether in the United States or globally in countries like China or India, will provide a tailwind of growth for well positioned companies since many nations are currently focusing on major rebuilding and "reflation" initiatives.