Ron Gambassi
September 28, 2011

It can be bad for traders and good for investors.

Stock market volatility sounds like a dirty word but it can be a friend to the individual investor. Let me explain.

If you are trader,  market volatility can lead to your doom. Professional traders like to make big bets. A trader that bets the wrong way before the market takes a precipitous fall can suffer losses from which he can’t recover.  It’s true that the trader can make a huge score too but if he gets it wrong then his next move is to attempt to control the damage and often results in an even bigger trade in the opposite direction.

For the non-professional trader the likelihood of making the right call, at the right moment during a day with lots of volatility is really a fool’s game. The non-professional doesn’t have the pricing power, technology, or market knowledge to achieve consistent success during volatile market movements. Eventually he will get burned badly.

On the other hand the investor who applies three key principles can benefit from short term volatility. The principles call for having:

1)      A long term investing horizon (i.e. 10 or more years)

2)      A defined asset allocation policy

3)      A scheduled asset rebalancing plan (i.e. quarterly)

If the value of an asset drops noticeably below its target allocation during the quarter, money can be re-allocated to buy that asset at a lower (and favorable) price. This works especially well when there is cash in the portfolio that can be put to work buying the asset that declined in value.

Successful investing is about planning, discipline and patience.

What are your thoughts? Please feel free to comment below.

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