Broker Check

Making money on the fiscal cliff

July 9, 2015

The fiscal cliff may effect more than your taxes and the fiscal health of our country. There are ways that you can use potential volatility to your advantage. The first thing for you to be aware of is the amount of risk you are willing to take. Never risk more money than you are willing to lose. Any time there is a chance for you to make money on a transaction you also have a chance to lose.

Depending on your appetite for risk there are several ways you can place your bets. For those with a super-sized appetite, there are websites based in Vegas. For those with a more average stomach, you only need to listen to the news and put your knowledge to work.

The first thing you learn about the fiscal cliff is that if the elected officials in Washington do not come to an agreement before the new year taxes will go up and spending will go down. All of the talking heads then exclaim how this will be bad for our economy in their own way. The potential for an event to have a temporary effect on the economy creates volatility in the markets. When this movement occurs is when you can make money.

Of the many ways, you can make money on this volatility the most simple is to buy a security whose value has been negatively impacted by the event that will recover quickly. Buy low, sell high.

If the purchase of a single security involves too much risk, you can make the same play on one of the indexes.

If you like to hedge your bets even further you can also buy a security with a negative correlation to the market. Meaning it goes up when the market goes down and down when the market goes up. Determine the allocation of your investments between the two and reallocate according to your plan as the two change in value.

If your head has started to spin while trying to follow these options you may want to think about this in another way.

If you are currently invested according to your risk tolerance and your investments are being actively managed you are likely already taking advantage of this activity. If your not sure if you are or not you need to talk with a professional.