Lately stocks have been on a roller coaster ride, going up and down by several hundred points on a daily basis. Yesterday, stocks went up 247 points, which helped to make up some for the previous day’s triple digit losses. Small investors I talk to tell me that the recent decline in stocks has them worried because it is beginning to have an effect on their investment portfolios. Since July when the Dow hit an all time high of 14,000, it has seen 14 days of triple digit change from the previous day, and in the short time since hitting this high is down by 6.5%.
Whereas this volatility scares small investors that have investment strategies aimed more toward long-term concerns like retirement, other investors such as day traders find opportunity in the movement. The article, Love That Volatility by Ben Levisohn, in the September 3, issue of Business Week, points out how day traders use the movement to buy and sell stock at a profit. As the up and down motion of the roller coaster ride becomes more drastic, it translates into more profits for the traders, who use “short-term moves of a point ($1) or more, up or down, to make money.” The day trader referenced in the article made $200,000 a year for three years using this method of stock investing.
Since 2003, the stock market has seen steady gains, and until recently, has been fairly stabile. Although stocks are down 6.5% since July, overall they are up 5% since the beginning of the year. Even though some small investor’s portfolios have dropped in value in the short-term, overall they have gained in the long-term. The main thing to remember in these periods of high volatility is to invest in stocks that have less risk. Since the last period of volatility ended, stocks have risen from a low in the 7000’s to a high of 14,000 on July 19, 2007. This is quite a long-term jump.