The Doldrums of Summer
The summer months typically create a slower moving market; weaker volume and more unpredictable situations occurring on a daily basis. Think about it, what would you rather be doing - analyzing the fundamental and technical indicators of the day or taking a much needed vacation to the beach or the mountains? I personally enjoy both scenarios, and most likely so do you, but let's be realistic, this is the time of year when most families take a little time off and try to relax and calm their emotional and physical conditions.
Money managers, brokers and other traders have the same idea; getting away and spending a little time with their families causing an annual phenomenon called the "summer doldrums." If the investment professionals aren't in the office, that means they aren't as likely to buy or sell, which creates reduced volume. This lack of volume causes the volatility because the buy/sell orders that are accomplished during the "doldrums" will cause a greater impact since there are fewer. If a stock trades 30 percent fewer shares in a day than it normally does, a single order could have a greater impact on the price by forcing the issue to fall as you sell your shares.
Consider examining your money management techniques to lessen the risk. One method of reducing your risk during times of uncertainty is through diversification. Don't put all your eggs in one basket. As an example, in the equity segment of your portfolio, diversification can take shape through domestic and foreign stocks, blue chip and small cap stocks, and value and growth stocks. These different asset classes have a tendency to move in different ways. Make sure you spread your investments over a variety of investment opportunities, not just in different sectors of equities but make sure you are in a variety of different investment vehicles. Consider mutual funds, bonds, real estate and never forget cash is a position.
Just like you need to constantly balance the events in your life, you also need to balance your personal investment portfolio to ensure your risk is reduced as much as possible. At this mid-year point, it also might be wise to take a little time to examine your portfolio. Are you invested in the right things? It might be time to redistribute your money and rebalance your portfolio. Also, consider any recent changes in your life. Maybe you've recently gotten married or divorced, perhaps you're saving for your children's education or maybe you've changed jobs recently and now have more money set aside to invest. Life is always shifting and moving in different directions so don't forget to alter the way you invest when life changes course.
The volatility that tends to occur this time of year isn't all bad; as a matter of fact, it might be a good thing. As long as you know what to expect, you can modify your trading strategy to fit any situation. Never fear, things will get back to normal after Labor Day as the money managers and brokers get back to work and the kids go back to school. In the meantime, just be aware that things could be a little unstable for the next few weeks. Make your adjustments and stick to your strategy.
Happy Investing!
Originally published in the Outspoken e-newsletter.