How You Can Profit From Market Volatility

Leading money managers share the best strategies for building your portfolio

Garrett’s revised strategy—and those of hordes of individual investors—came about as equity markets were being hammered, largely dented by a combination of recent bad economic news: From Aug. 5 through Aug. 26, the Dow Jones industrial average dropped 1.40%, the Nasdaq composite index fell 2%, and the Standard & Poor’s 500 slid 1.88%, according to SNL Financial L.C., a Charlottesville, Virginia, financial services research firm. But gigantic swings of several hundred points in a short time have become the norm.

Wall Street has felt shocks from heightened fears about the sour economy, the possibility of a double-dip recession, and worries over the European debt crisis. Moreover, on Aug. 5 Standard & Poor’s slashed the United States’ credit rating to AA+ from AAA. Also in early August, the Federal Reserve pledged to keep interest rates super low for two more years making investors scratch their heads over the long-term impact of those events.

Well, expect more volatility. The market will continue to seesaw as a congressional super committee deliberates over the best way to shrink the federal deficit and the 2012 presidential contest heats up. Despite the unpredictable climate, a group of top-flight money managers says there are still some attractive places to invest your money—that’s particularly true for long-term investors willing to ride out some short-term bumps.

Stay calm and focus on long-term goals. Isaac H. Green, CEO at Piedmont Investment Advisors, says Garrett’s portfolio shifts were based on his risk tolerance and need for safety. He believes investors must realize in a turbulent market that short-term risks are magnified by market volatility. If a person has a long-term horizon, they can actually afford to not pay too much attention to market turbulence.

William H. Young, president and COO of Buford, Dickson, Harper & Sparrow Inc., a St. Louis-based portfolio management and financial services firm, agrees, urging investors not to panic: “Staying calm will keep investors from making knee-jerk decisions that they will regret when the market settles down.”

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