The second round of quantitative easing ends in June. Quantitative easing was the Federal Reserve's attempt to boost the economy by purchasing long-term Treasury bonds -- prominently derided as "money printing." So what does this all mean for investors?
Frankly, no one knows for certain, but there's plenty of speculation we could be in for a rude awakening. Blogger Chris Martenson sees a big storm ripping through the markets, writing: "The end of QE2 is going to be a complete disaster for the paper markets."
Plan for volatility
Commodity prices have indeed been falling. Oil and copper are down from their highs, and silver isn't getting any respect today. Is this the beginning of Martenson's predicted end? That's unclear. Silver Wheaton
Other expert opinions run the gamut. BlackRock equity strategist Bob Doll says the end of QE2 should be a non-event, while Jeremy Grantham recently recommended selling riskier assets. So it makes sense to have our own plan for how to deal with the likely volatility. After all, the S&P 500 dropped more than 15% soon after the first round of quantitative easing -- and Martenson thinks prices could decline 20% to 50% following the end of QE2.
Here's how we can make money after QE2 ends.
- Find strong company in strong trends.
- Trade when necessary.
- Only bet with the odds.
Let's take a quick look at how these steps work together. Then, if you're interested, I'll offer you three strong trends and one money-making trade I've found, along with the trade plan to execute the strategy.
Short-term versus long-term trends
Oil prices have been falling recently. The light crude index is off almost 15% from its high in May. Is the trend telling investors to steer clear right now? Hedge fund manager Steven Cohen believes it's creating opportunity. He recently said:
"I think that energy stocks are discounting oil prices much lower than where we are trading today."
My calculations agree. A recent review of enhanced oil recovery company Denbury Resources'
Will oil stay near $100 per barrel? Over the long term, there's a strong chance. That's why Sandridge Energy
Trading is not a dirty word
The Motley Fool believes in the benefits of long-term investing -- and so do I. But like any good craftsman, we can't rely on only one tool to get the job done. Following the aftermath of the credit crunch of 2009, I expect markets to be volatile over the next three to five years. So trading will be an important tool in every investor's toolbox.
Source: Capital IQ, a division of Standard & Poor's.
For many years, it looked like a stable buy-and-hold company, as did competitor Huntington Bancshares
No, I am not advocating day trading. What I am saying is that flexibility can be valuable. And today, I think that means being willing to trade a little more often to protect and grow our capital.
What are the odds?
You may be wondering, "How will I know when to trade and when to hold?" That's a great question. I think the answer depends on how we assess the odds of success, which is exactly why we need a trade plan. Let's take a look at two fantastic companies to try and drive the point home.
At the end of 1999, at the top of the technology bubble, Amazon.com
We can see a similar story with another ground-breaking company, salesforce.com
The lesson is that assessing the odds can help us make better decisions -- and generate higher returns. We don't have to buy precisely at the bottom or sell at the top. That's virtually impossible. But we have to be willing to pass when prices look high and strike when prices look attractive. That's why I always use a trade plan now.
Plan for success
The next few months -- and few years -- could get a little bumpy as our economy and financial markets work through the aftermath of the credit bubble. That's why I plan to:
- Find strong companies in strong trends.
- Trade when it's better to trade and hold when it's better to hold.
- Use my trade plan to bet with the odds.
In fact, I am investing $50,000 of my own capital using this approach. And I expect to make more than my fair share of money over the next few volatile years.
If you'd like to find out about the "3 strong trends and one money-making trade" I mentioned at the beginning, I'll be happy to send you my free report, including the trade plan, absolutely free. Simply click here and enter your email in the box to let me know where to send it.
David Meier is associate advisor for Million Dollar Portfolio. He does not own shares in any of the companies mentioned. The Motley Fool owns shares of Denbury Resources. Motley Fool newsletter services have recommended Amazon.com and salesforce.com. A separate Motley Fool newsletter service has recommended a short position in salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.