What You Can Do To Survive A Chaotic Market
I’m going to make this brief. Everyone knows that the market is in total panic mode due to the coronavirus pandemic.
These are strange times, no doubt about it. Businesses are closed, the streets are quiet, and there’s red across the board in the stock market.
I know many of you are watching the market swing wildly on a daily basis just like I am. Remember: This too shall pass. As I told my High-Yield Investing premium readers recently, I’m closely monitoring the ongoing situation. And I remain steadfastly positive on the long-term outlook for most of our holdings.
I’ve been in this business for close to 20 years. And before that, I was a financial advisor. While this is an unprecedented time, I’ve seen my fair share of market panics.
For those who may have forgotten the downturn of 2008, this is not a tide you want to swim against. I’m not suggesting this is a repeat of the financial crisis. Far from it. But it doesn’t mean you have to sit idly by. Here are a few guidelines I shared with my High-Yield Investing subscribers that you might want to put into practice:
1. Have an exit strategy: There’s nothing more frustrating than watching a hard-earned gain on a stock unwind and disappear in a bout of panic selling. Setting or tightening trailing stop losses can keep you in the game while still shielding your profits.
2. Be proactive, not reactive: Don’t let market turbulence cloud your judgment. Being glued to the ticker tape will only tempt you to buy heavily on good days and dump everything on bad ones, neither of which is smart. Instead, marshal all the information at your disposal, keep your ears to the ground and stand by your convictions until the facts say it’s really time to pivot.
3. Look for disconnects: At times, it can seem that investing is a one-way street on which everything is rising or falling in unison. Each sector of the market is driven by its own unique set of variables – and sometimes the good is discarded with the bad.
4. Lower your cost basis: Resist the urge to automatically double down on a stock just because it’s 20% or 30% below where you bought it. Cash flows (and fair value) are still predicated on supply and demand. So if demand slumps, then a stock that looked cheap at $70 might actually be expensive at $50. That being said, if there has been minimal change in the fundamentals, then an unfair pullback can be a great time to increase your stake.
Action To Take
I’m keeping these points in mind with each one of our High-Yield Investing holdings. And you should, too. There are reasons to believe this sell-off could prove to be a wonderful opportunity to get in on some great income-producing names at a great price.
I think a splash of cold water is just what we need to chill some of the more overheated sectors. And I’m taking advantage by dipping my toe into the water with a few select positions. Still, I’m holding on to plenty of cash in the portfolio for the time being.
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