How to profit during market volatility

For four years now, investors have reaped the rewards from a very generous stock market.

Over that time, we haven't seen a correction of 10% or more - a truly impressive feat. And as share prices have zoomed steadily upward, you haven't had to look very far to find bloated permabulls breathlessly calling for more. Talk about collective amnesia! Seems like someone forgot to tell these folks that stocks go down as well as up, which is why I don't dress up in silly party hats whenever the market hits a new milestone.

Likewise, when it drops precipitously - as we've seen it do recently - there's no reason to shift into bear mode. There are always moneymaking opportunities available - and if you use this remarkably simple and effective method, it's much easier and quicker to find them when needed...

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Scan The Radar For The Leaders And Laggards

Whenever the market soars or crumbles, I always make a point of checking out the extensive list of stocks I have on my watchlist to see if I can take advantage of the move.

Many times, market volatility actually presents a great opportunity to enter positions at better prices. For example, a stock might be oversold and primed for an upward run. Conversely, maybe a position is overbought and due for a pullback.

Ever since I started investing, I've kept a list of stocks that I'm interested in buying (or shorting) but either couldn't or wouldn't. When I came out of school, it was simply a case of not having the funds. But now, different factors come into play. Maybe the price is too high right now. Maybe the market conditions aren't right. Or maybe the company simply isn't profitable.

Keeping a watchlist is a simple, yet remarkably effective thing you can do. It keeps you focused, disciplined, and ready to take action faster than if you start from scratch.

For example, as I watched the market come back to earth, I scanned a list of stocks at 5:00 A.M. the other morning - and thought my bleary eyes were deceiving me.

Up popped a biotech firm that I've had on my radar for some time now - one that may have the answer to a disease that could reach epic proportions over the next 20-30 years.

It's not that the stock trumped the market and rose during the selloff. It declined with the broader market by 12%, actually. But while most investors might blindly follow the crowd out the door, I was happy. It's noteworthy that it did so on no negative news. In fact, the fall occurred despite the company beginning two clinical trials.

The stock has now dropped almost $3 to a very attractive price - and I plan to recommend it to subscribers in the next Xcelerated Profits Report issue.

The tools that willl help you to be a better investor

Of course, keeping a shortlist of potential companies to choose from still means you need to do your due diligence and revisit your reasons for buying. But if you can have candidates ready, you'll have a good headstart on the crowd. And when the market and individual stories change, you can add and delete from your list.

But many financial/investment websites like Yahoo! Finance and online brokerages have simple tools these days that alert you when a company has news or the stock hits a certain price. You can also enter your data into an Excel spreadsheet that will help you calculate hypothetical returns rather easily.

A Watched List Ensures No Opportunities Are Missed

Regardless of whether you go low-tech or high-tech, a watchlist is an incredibly useful tool. Not only will it help ensure you don't miss an opportunity in a stock that you're keeping close tabs on, it will help you evaluate your own strengths and weaknesses as an investor.

Be sure to review your list and your reasoning at least once a quarter (even the stocks you're no longer interested in). No doubt you'll have a few, 'What the heck was I thinking?' moments as you'll have the benefit of 20/20 hindsight. But it's a good lesson that will only make you a better investor going forward.

By Marc Lichtenfield, Senior Analyst, Mt. Vernon Research for the Smart Profits e-Report, www.smartprofitsreport.com