How to Make Money During Market Volatility

With market volatility rising, some investors fear a pending correction, but with the right stocks you can make money in any market.


World Map with Downward Arrow

For the past few months—just like investors all over the world—the Financial Freedom analysts and editors have been discussing this long bull market, high stock valuations, and the possibility of rising market volatility. We’ve been carefully monitoring the behavior of sectors, advances/declines, and options action, as well as more fundamental parameters like purchases and sales by institutions and company insiders, searching for indications that the bull run might be ready for a significant correction. 

And while none of us claim to be market predictors, we’ve all been investing for many years, and have lived—and profited—through lots of market cycles. Consequently, we’ve learned that money can be made in good and bad markets, and most certainly, during periods of market volatility.

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Anyone looking at the following chart can be very thankful for this long bull market and all the opportunities for profit that we’ve taken. But—while we make no market forecasts—it’s clear that market volatility is rising and valuations are very high; investors need to exercise some caution in order to hold onto existing gains and recognize the opportunity for new profits.

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Each of our analysts suggested some great ideas, including using options to protect your profits, buying undervalued companies when they are severely discounted, and stocking your portfolio with healthy doses of businesses paying attractive dividends.

I’d like to offer a few more “tried and true” strategies that have paid off over the years.

Bottom line, I think the most important line of attack during market volatility is this: Buy fundamentally strong stocks that:

  • Are undervalued in relation to their peers
  • Have excellent cash flow, with most of it derived from their primary business
  • Are not burdened by too much debt, so they remain flexible in seeking new opportunities
  • Have more buyers than sellers, creating momentum in their share prices
  • Enjoy rising moving averages.

Second, I look for companies that have strong catalysts that are likely to boost share prices, including:

  • Insider/institutional buying
  • Analyst upgrades/initiations
  • Operate in an industry with lots of mergers & acquisitions, and who may be a prime candidate for a buyout
  • Spin-offs, which can cause both the parent and spun-off prices to rise
  • Stock buybacks, which while usually temporary, can give a lift to prices
  • Special dividends, which often boost prices, but offer the second benefit of increasing your gains
  • Evidence of a turnaround, with long-term earnings and revenue implications
  • Earnings and revenue triggers, such as new product lines, drug discoveries, rising market share, etc.

Once you fill your portfolio with stocks that have great potential, be sure your holdings are diversified by Market Cap and Industry, set your mental or actual stop losses to protect your profits, and remain disciplined in your buying and selling approach.

One last thought that may help you in this period of market instability. Research indicates that historically, the following sectors have been the winners during bear markets. I don’t think you’ll be surprised to see that they are primarily what analysts call “defensive industries.” It may be a good tactic to add a few to your portfolio on the down days—just in case this volatility persists for awhile.

  • Soft drinks companies
  • Major pharmaceutical companies
  • Food producers
  • Major oil companies
  • Basic household products companies
  • Incumbent telephone companies
  • Tobacco manufacturers
  • Electric utilities

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