Tuesday, April 14, 2020

Take Advantage of Volatility - The Limit Order

There are lots of different views on the economy and the stock market right now due to COVID.  I am quite pessimistic about the economy in the short to medium term due to:

  • Shutdowns for COVID: massive unemployment, supply chain disruptions, psychological impact
  • Globalism and free trade: Trump, China, and COVID have dealt a big defeat to these concepts and the economies of many countries
  • Lack of productivity: why are companies worth so much in the first place
  • Central Bank and government actions on COVID: these have never been tried before and we don't know the effects on employment, inflation, businesses
  • Psychological effect: it will be hard to get people to work again after this fatal threat
But others are not so pessimistic and the stock market is recovering, but not smoothly.  One day, the market is up by 4%, another day down by 4%. Bond ETFs are less volatile, but were down about 12% at one point and then quickly rebounded.

I personally want to keep at least 2 years spending in cash just in case, so I need to sell ETFs (bonds or stocks) or stocks.  I also want to maintain my asset allocation targets.

What is the best approach?  I could just put in a market order to sell when I feel really pessimistic and probably get a low sale price.  I could watch the ups and downs and try to pick a day when the market is up.  What I ended up doing was putting in a limit sell order at a price that I thought was high, but not so high as to be unattainable.  For example, Vanguard Total Stock ETF has been as high as $160 and as low as $115 in the last month or so.  I put in a limit sell order at $142 when it was around $120.  Today, the order went through.

So my idea is to use limit orders to take advantage of volatility in the markets.

Disclaimer: this is not professional investment or retirement advice and should be used at your own risk. The author is not a licensed financial advisor. You should not believe everything on the Internet including this blog and should check multiple sources possibly including a professional financial advisor before making decisions.

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