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Investing In A Volatile Market

If you follow the financial markets, you're likely recovering from whiplash. After some steep declines, the Dow Jones Industrials last week moved back into positive territory for the year. So what's the best strategy for investing in such a volatile market?

Offering up some tips to get you through this economic rough patch is editor of SmartMoney.com, Ray Hennessey.

First, you must have a selling discipline. "People's knee jerk reaction when they see [the market] going down for weeks on end and then up for a couple of days, they say what should I be selling," Hennesey says.

However, that is not the attitude you should have. When you buy a stock you should know why and when you want to get out of it. You never make money until you sell a stock. "At a time like this, if these stocks aren't moving in a place that hits the selling discipline, you leave them alone," adds Hennessey.

Secondly, use options trading. People get worried about options trading, because they think it's for the sophisticated trader, but Hennessey explains it's not. Options trading takes the edge off. If your stocks fall below a certain level, you at least have options on the side.

"Now is the time to crack open the books, go on the web, learn about options trading, talk to people about it and get into it," encourages Hennessey.

And last, switch to balanced funds. "Right now, people who are really nervous turn to mutual funds, particularly balanced mutual funds, Hennessey explains. "What that allows you to do is, that gives you some upside in the bond market when you have a downside in the stock market."

But Hennessey reminds that this isn't a good long term investment. "It's one thing to buy and sell stocks it's another thing to invest in funds and let the professionals do it for them."
by Jenn Eaker by Jenn Eaker