December 2019 is closing out one of the best years on the market in recent history and recession fears that were lingering in the summer have abated. Economic indicators are positive and point to a melt up in the overall market but there are still unresolved catalysts for volatility on the horizon. Brexit, US elections, and details of the phase one trade resolution with China are going to create turbulence and I hope to address it with a simple investing strategy.
I charted GLDM vs SPY for the last two years and highlighted three other more minor periods of downturns here. Also, the you can refer to the image below. I recall the drop of 2018 very well. It erased my entire 2018 worth of gains and I think my account even dipped negative for a few days. I didn’t have cash or “safe” assets on hand to play the downturn and I ended up missing great entry points. Looking at the December 2018 dip we had a peak on 11/26 and weekly declines until the market bottomed on 12/17 before crawling back up.
Rather than sit on my hands during another dip I’ve crafted a very simple two point strategy that should be able to take advantage of another December 2018-like pullback. The strategy is as follows:
- Maintain positions in gold and cash. Since the market is hot, I want to keep most of my money invested in stocks and keep small hedge positions in gold via the GLDM ETF and cash in a 1.8% interest savings account. GLDM should either remain stable or appreciate during market downturns and cash of course will remain stable. My overall account value as of Christmas 2019 stands at 650,000 dollars (thanks to an awesome December) and my holdings in GLDM and cash are currently 5,000 and 12,000 dollars respectively.
- On the second consecutive week of negative returns I will buy positions of SPY and increase my contributions geometrically for consecutive down weeks. So for example, I will not respond to one negative week. On the second consecutive negative week I will buy a 1000 dollar position in SPY. On the third negative week I will buy 2000 dollars of SPY and on the fourth 4000…etc etc. If we see a positive week I will reset.
- negative week 1: no action
- consecutive negative week 2: +1000 in SPY
- consecutive negative week 3: +2000 in SPY
- consecutive negative week 4: +4000 in SPY
- consecutive negative week 5: +8000 in SPY
This isn’t a perfect strategy and there are many cases that this wouldn’t cover. It wouldn’t adequately handle a long extended drop or a market downturn that sawtooths downward but it will handle week on week negative slides similar to what we saw in 2018. More importantly I’ll have a way to adjust for downturns and won’t be completely at the mercy of a negative market.