6 Tips To Keep Your Head When The Market Misbehaves
In just a few days, an important date will pass that marks an important change in the way investors looked at the markets. That day (September 15 to be exact) will mark the day that the investment bank Lehman Brothers filed for bankruptcy.
Most of us were in the market the day that happened and were around to witness what unfolded next.
Waves of foreclosures… More bankruptcies… Global trade halted… Credit bone-dry.
We came extremely close to a “systemic meltdown,” according to the International Monetary Fund. And from the peak on October 9, 2007, to the bottom on March 9, 2009, the S&P 500 dropped 56.8%.
I’m not here to bring these events up to force you to relive the trauma of those days. (And I don’t think I’m being dramatic by calling them that, either.) But what I am here to do is remind you that if I didn’t bring this up, most of you would have watched this date go by unnoticed.
The point is, we survived.
Another Time Of Uncertainty
That brings us to this year. Roughly 13 years after the financial crisis, we were subjected to another economic trauma as the coronavirus spread around the globe and brought life to a standstill.
As states issued “shelter in place” orders, stores closed, people stocked up on food (and toilet paper). Zoom meetings became a thing. Guns and ammo flew off the shelves. And once again, markets tanked.
The Fed’s reaction time was quicker this time around. And it even added new pages to the playbook.
We won’t get into the details (or the merits) of those actions today. That’s best saved for another time.
What’s important is that the worst of this trauma seems to be in the rear-view mirror. But it still looms large. So much so that when tech stocks began to drag the market lower last week, you could practically feel investors tense up, wondering if the other shoe was about to drop.
I get it. After two (very different) major economic crises in our lifetimes, investors are understandably justified to feel a little traumatized. In fact, one of the most frequently asked questions we get is what to do when the next big market crash comes.
It’s time to put some of those concerns to bed.
I recently came across some tips shared by one of my colleagues a few years ago. They address how to stay objective with your portfolio regardless of the market or whatever else is going on in the world. I thought they were too good to pass up, so I’ve modified them in order to share them with you today.
6 Tips To Keep Your Head
1. Remember that the experts can be wrong. In fact, the experts can be wrong for a long, long time. And business television channels find guests with extreme views just to drum up ratings. So please don’t lose a minute of sleep over the ramblings of pundits or television talking heads.
2. Maintain a comfortable cash cushion. As investors, we have been made to feel guilty about holding cash. It’s as if we’re shirking our responsibilities. We feel like we should always have our entire portfolio working for us. But cash does work for us. Cash holds up pretty darn well in a downturn. Cash helps us sleep better at night, no matter what the market throws at us.
And cash allows us to buy opportunities during a downturn, without having to liquidate another position. How much cash you hold is a personal decision based on your financial needs, market conditions, and your risk tolerance. But if you wake up during the night worried about your investments, you probably need a little more cash in your portfolio.
3. Count your gains or dividends. Positive reinforcement is a valuable tool, especially if the pundits or markets turn negative. Personally, I like to review the gains I’m sitting on from my longest-tenured holdings – just to see how far I’ve come. The point isn’t to deny reality, but rather to gain perspective. When you’re sitting on a long-term winner of, say, 250%, then a 10% correction is a lot easier to digest.
4. Reevaluate your holdings. The goal for most investors is to buy, hold, and reinvest for the long haul. But when global economic or political conditions change, it is always a good idea to assess its potential impact on your holdings. To do this, you must stay objective, which can be difficult when information is limited and panic starts to rear its ugly head. Sell only what you believe has a significant negative outlook — and leave the rest alone.
5. Be careful with your stops. Stop-losses can be tricky. I don’t want to tell you not to use them, but think twice before you put one in place. The last thing you want is to get stopped out of a position at a low price, only to watch it rebound at the end of the day or week.
If it’s a stock that has a history of wild price swings, think about how you might react. Will you be glad you got out? Or will you be mad because you may actually want to buy more? Do this before putting the stop in place. If you want out of a position or need to raise cash — go ahead and sell outright. It takes discipline, but you need to develop this skill if you want to be successful in the long run.
6. Keep a shopping list. During the last bull market, there used to be an acronym that traders would throw around: BTFD. (I’ll let you guess what that means.) This is not an endorsement to “buy the dip” every time. After all, what looks “cheap” today could be cheaper tomorrow.
Personally, I keep a watchlist of securities I wished I had bought the last time the market tanked. Occasionally, I may go ahead and buy if it’s still a good deal today. But if the Dow ever pukes up 2,000 points, you can bet I’ll be ready to go shopping, with a high degree of conviction whenever I pull the trigger. As an added bonus, income investors have a special incentive for bargain shopping high-quality income securities on dips — because when prices fall, yields rise. And it’s one reason why it always helps to keep a little extra cash on hand.
Action To Take
I don’t know whether the recent choppiness in the market will lead to another leg down. I don’t have a crystal ball. But what I do know is that if you keep these tips in mind, you’ll be much better prepared for when it does.
Even better, in an ideal scenario, a few years from now you’ll be sitting in front of your computer. You’ll see the talking heads on television start to wave their arms in exasperation as the next major economic event begins to unfold. You’ll have these tips printed off next to you (or stored away safely in your head). And you’ll smile, because you’re ready.
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