"Street Critique"-Matt Krantz, Markets Reporter at "U.S.A. Today
Wednesday, August 01, 2007PAUL KANGAS: Volatility has certainly been the watch word on Wall Street this summer and tonight's "street critique" guest has some ideas to help you weather the trading swings. He's Matt Krantz, markets reporter at "U.S.A. Today." Matt, welcome back to NIGHTLY BUSINESS REPORT.
MATT KRANTZ, MARKETS REPORTER, USA TODAY: Thank you, Paul.
KANGAS: Matt, what can investors do to protect their portfolios in this crazy market?
KRANTZ: Market volatility is a lot like a roller coaster. It can be a wild ride, but you can protect yourself. With a roller coaster you can put on your seat belt, but with stocks you can buy what's called a protective put.
KANGAS: A put option, which gives you the privilege of putting the stock at a prearranged price to a potential buyer.
KRANTZ: That's right. You can buy this and it's almost like buying an insurance policy. And it generally costs between 1 to 2 percent of the price of the stock to protect yourself for a downside risk of about 10 percent.
KANGAS: Uuh-huh and the more volatile the stock, the bigger the premium to get a put, right?
KRANTZ: That's exactly right. With a wild stock, you're going to pay a little bit more than that. And for a less crazy stock, you're going to pay a little bit less.
KANGAS: What kind of asset allocation do you recommend in a market like this?
KRANTZ: Well, it's a great time to be looking at your asset allocation. Make sure that if you're in some really risky areas like emerging markets or small cap stocks, you want to make sure that you're comfortable at those levels. If you're not, you can move it into a less volatile area, say large cap value price stocks.
KANGAS: Are there any hard and fast rules for cutting losses from your portfolio?
KRANTZ: Really some professional investors like to keep losses to 10 percent with individual stocks. It's really up to you. And you got to remember that protective put is your friend if you're afraid of volatility. You can buy that insurance to protect yourself.
KANGAS: Uh-huh. You wouldn't drive a car without insurance, so why should you own a rather expensive stock?
KRANTZ: Exactly right. You don't complain if the stock doesn't go down any more than you complain if your house doesn't burn down if you have fire insurance.
KANGAS: Right. Now that we've talked about protecting yourself from volatility, what can investors do to make money in this environment?
KRANTZ: Well, there's always a way to speculate. And there's something called the volatility index. It's an option that you can buy. And basically the volatility index also called the VIX goes up in value when people get nervous and scared. So if the market starts swinging like crazy, the VIX will go up in value and you can invest in that.
KANGAS: Does asset allocation come into play here as well?
KRANTZ: It sure does. If you want to expose yourself to some of the areas that you expect to see some big moves, you can always move into areas that are really beat up, say the homebuilders or the mortgage players, and try to pick the ones that you think can survive. It's a big gamble, but it can pay off big if you're right.
KANGAS: What about investing in exchange traded funds that track volatility? Is there something you'd recommend there?
KRANTZ: There are some exchange-traded funds that are designed to swing even greater than the market in general. There's a few and they're called ultra funds that go up more than the market and then there are short funds, ETFs, that you make money if the market goes down. These are other ways to kind of make money from big swings.
KANGAS: A yes or no answer to this. Would you recommend selling stocks short that you think are too expensive?
KRANTZ: It's generally not a great idea for individual investors. One of the major reasons for that is you're essentially taking unlimited risk.
KANGAS: Right.
KRANTZ: If you bet a stock is going to go down and it doesn't and it goes up, there's no end to how much money you can loose.
KANGAS: Understood, Matt, it's great to see you again. Thanks for your timely ideas.
KRANTZ: Thank you very much Paul.
KANGAS: My guest Matt Krantz, markets reporter at "U.S.A. Today."
