The Impossible Plan Part 3

The thing is how do you go about designing an investment strategy when markets are in a free-fall? The answer is always in the timing and no one can say when or how far things will tank. For historical perspective we only have to look over our shoulder and see how well some of our esteemed economists predicted this latest mess.

My friend and client Jack wants a plan that allows him to minimize his losses during a market meltdown and, at the very least, be able to take advantage of lower stock prices. I finally decided the best possible plan was to establish a cash account far in advance ear-marked specifically to be used to buy funds, ETFs or stocks when the markets fell.

This simple idea solved several problems. It created an emergency fund; it also settled the tax question and the timing question. Jack would not have to sell anything and it allows him to buy on the cheap more of the same holdings or whatever that would be deemed special at the time. He wouldn't have to commit all his money but could dollar cost average as the situation merited.

The only question to answer is when to buy. The solution I locked onto was to use the VIX. VIX is the symbol for the Chicago Board Options Exchange Volatility Index. Basically it is a composite that measures the S&P-500 index over the coming 30 days. The number the VIX provides is a percentage to expected annualized changes in the S&P 500 index. When the VIX hits numbers higher than norm, lets use 30 for now and that can change depending on a variety of factors, than this indicates major moves either higher or lower, but historically lower values in the S&P index as investors have labeled the VIX as a measurement of investor fear.

When there is a sudden spike in the VIX I know to expect a sell-off in the markets, and I have not been disappointed in the past. A spike doesn't necessarily mean to buy that day but by following the VIX an investor can determine when to start buying quality at cheap or reasonable prices.

It wouldn't hurt to do some historical footnoting and see how well the VIX and the S&P 500 index have worked in the past. You can graph both the VIX and the S&P 500 and see how they work together to provide an investors with a strong indicator of when to buy or sell.This is not only a sound idea for uber-market collapses but also when things run sour temporarily and provide you with an idea of when to enter or leave the market.

I just hope Jack appreciates everything I do.