How to Invest and Trade for 2022
Another year is almost upon us. Among the various New Year resolutions that many of us make, or should be making, are decisions about how to invest and trade for 2022. If we knew for certain that 2022 is going to be an absolute shit show, are return to sanity with a bull market, or some mixture of the two we could easily make our decisions. The problem is that we don’t know, which is the typical situation that investors and traders find themselves in as a New Year rolls around.
Will the Fed Get it Right?
After dragging their feet for most of last year the US Federal Reserve and Chairman Jerome Powell announced that they are going to taper off their bond buying and, most likely, raise interest rates at least twice in the coming year. How the Fed navigates these waters, if they come in too weak and let inflation rage, come in too strong and kill the economy, or nail it with policies that are perfect will determine how well the US economy, markets, and people’s lives go for the year and years to come. We wrote recently about the perils of taming inflation and how during the 1980s the Fed jacked up rates, killed inflation, and also drove unemployment up for seven years. Because we do not have a crystal ball and cannot see how successful the Fed will be, what sort of global mischief the DRINCs will be up to or when the market will care, or not, we suggest three possible courses of action. The three are holding cash, going to MAA, and going NUTS.
When you really have no idea what the market will be doing the best course of action is to hold cash. You will hear some say that this course of action will result in missing out on a big rally. The fact is that you may miss out on the first stage of a rally but you can still jump in. By holding cash you will avoid getting caught in a major downswing and losing all of your investment and trading capital. The key is to not let FOMO (fear of missing out) drive your investing and trading decisions. Remember that the market typically takes the escalator up which gives you time to jump on when a rally starts. The market commonly takes the elevator down which is why you should be in cash when you have no clear idea of where stocks are going next.
At Top Gun Options we use the acronym MAA for Microsoft, Amazon and Apple. All of these companies print money. They are not going to collapse and go away. The one caveat is Apple and its exposure to China. If things to go hell in a handbasket with China, Apple could not only lose its market in China but its production facilities as well. Otherwise, all of these stocks do well during good times, bad times, and normal times. When the market falls, investors seek the security of strong companies and invest in MAA among others. When another Covid variant drives everyone back home they make money.
At Christmas Time in 1944 the allied armies had landed in France on D-Day, pushed out of hedgerows of Normandy, driven across France and the Low Countries, and were perched on the border of Germany ready to end the war. The German army then launched its first winter offensive since the times of Peter the Great and enveloped US forces in the Battle of the Bulge. Things looked pretty grim for the Americans and the Germans demanded that they surrender. US General McAuliffe responded, NUTS. The Third Army regained lost ground and in 1945 swept across Germany to end resistance on the Western Front. This sort of all-out effort against all odds can also be applied to your investing and trading. You can jump into the crypto market in hopes of catching the next dip and riding it to double profits in a couple of days or seek to replicate this sort of success in stocks. The problem is that more often than not this approach leads to severe losses much more so than spectacular gains. If you are going to nuts of a tip or hunch, limit that effort to a small portion of your portfolio.
How to Invest and Trade for 2022
As we roll into the New Year at Top Gun Options we are 60% cash and 40% MAA with a tiny position in the NUTS column. Remember that MAA is virtually a good as cash with the potential for upside growth with any movement of the market.