Stock Market Investors Warning, Three Moves You Will Not Regret Taking Now
Stock-Markets / Stocks Bear Market Oct 19, 2009 - 10:52 AM GMTBy: Q1_Publishing
Most investors are still nervous.
The S&P 500 has reached its highest point since September 2008. After that time though, it went on to fall 26% in two months.
Earnings season is in full swing. And with each report we see top line revenues and bottom line earnings are not rebounding nearly as fast as stocks have.
The housing market is still proving troublesome for banks too. Aside from the shadow inventory, rising foreclosures, and the expiration of the $8,000 subsidy for home buyers, bank right-offs are still on the rise.
Then there’s unemployment, tax hikes, etc.
Basically, there’s not too much to be excited about from a fundamental perspective.
That’s why, as mentioned in our free e-letter the Prosperity Dispatch, I recommend making three moves now. And whether the market continues to go higher and gloss right over the real risk in this market, or we’re really at the euphoric top, you won’t regret taking the next few minutes to do these today.
The Real Risk in Today’s Market
As we mentioned above, there are a lot of economic roadblocks. Any one of them could easily trip up the recovery – or, more likely, the appearance of a recovery.
But as so many of us learned over the past few months, the stock market and the economy are two different things. The correlation between the two is abstract, not exact.
That’s where the real risk comes into play. If the markets were to take a turn for the worse, there aren’t too many catalysts to stop the overall market from falling.
And any downturn would just be exacerbated by what’s been fueling this last leg of the rally - emotional money.
You see, mutual funds, the favored vehicles of emotion-driven retail investors, have experienced 30 straight weeks of inflows. The Investment Company Institute has tracked a total inflow of $316 billion in the past eight months. The charge is on and any downturn could spark a quick flight from these funds.
You’ve seen what $300 billion of buying can do to push stocks up. There’s no reason to expect a similar sized drawdown to have the same effect, only in the inverse.
For now though, the trend is up, the herd continues to take money off the sidelines and throw it into markets, and the bulls have been able to stampede over any significant bad news. Still though, I recommend taking action of a different sort today.
Three Moves You Won’t Regret Taking Today
A downturn will come – eventually. And it’s never too late to get prepared. Make these three simple moves and you will be well prepared to navigate it all successfully whichever way the market goes.
Review Your Investment Plan
In our premium investment newsletters we NEVER enter an investment without a well-defined plan. The plan always includes how much we’re willing to risk, an expected timeline for results, a list of the potential catalysts (i.e. earnings, legislation, etc.) that would likely push shares higher, and an exit strategy.
Having a plan is essential to investing successfully. Now, with the markets reaching new highs and a few weeks of volatile earnings season left, it’s a better time than ever to review yours.
Prepare for How You Will Feel
What if the markets fell apart this week? What if the Dow fell 100 to 200 points a day with one of those 300 or 400 point down days thrown in there?
What are you going to do? Sell out and run to cash? Or are you going to buy on the dip?
If and when the markets do take a turn for the worse, you’re going to be faced with some tough decisions. And with your portfolio down 5%, 10%, or more, you will be at much greater risk of having emotions play a role in your decisions.
Emotions cloud judgment and, when it comes to the markets, lead to costly mistakes. There’s no way to avoid emotions when it comes to investing. There are, however, ways to mitigate the impact of emotions. That way is to get prepared for how you will feel if certain things happen. It's always a good time to get prepared for how you feel if the “what ifs” do play out.
Review Your Stop Losses
Almost 10 years ago I opened an account with Datek. It was one of the many online discount brokers started in the late 1990s and offered commissions of $7 per trade, or something like that. It was one of the best deals out there and their trading platform was one of the easiest to use too.
But that wasn’t the main reason for opening the account. Datek was the first online discount brokerage to offer trailing stop loss orders. They charged an extra $2 per order for trailing stops, but for those who used them, they were worth exponentially more.
Trailing stop loss orders progressively move up the stop point (the point at which your stocks will automatically be sold) as your stocks go higher. This unique structure allows you to ride a stock steadily higher and sell when it goes down past your preset limit.
The cost is that you will never make the perfect trade (which you probably wouldn’t make anyway). The benefit is you’ll never ride a stock all the way down to the bottom.
Mr. Market Is Not That Nice
These three moves are basic and obvious. Most investors (experienced and novice alike) fail to ever do them though and, in your editor’s experience, they always regret it.
For now though, I still don’t believe the markets are headed much lower in short-term. There’s just too much bearishness out there and too many investors expecting the markets to collapse. But I’m not about to let what I think or feel prevent me from navigating these markets successfully. And I hope you don’t either.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.
Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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