DOW Down Again: Stick to the Basics for Survival

DOW Down Again: Stick to the Basics for Survival

What goes up always comes down. Take this week, for example: the Dow was down 5.67%, the S&P 500 was down 5.95% and the Nasdaq was down 6.54%  –the biggest weekly percentage falls in two years. Ouch. This time it was the threat of a global trade war with China that sent the markets tumbling. Earlier in the month the market was rocked by the White House’s decision to institute tariffs on steel and aluminum imports.

If nothing else, this is a wake up call and firm reminder that it’s not if, but when, another significant market correction or crash will happen. Historically we humans are notoriously bad at predicting it, yet it’s all you hear from the pundits on TV. Indeed, we are nine years in to this bull market and a crash or another 10% correction could happen any day. It’s a good reminder to keep our trading basics top of mind.

  1. Think long term.
    Always invest for the long term. The majority of your portfolio should be long term plays. Trust in the power of time and compounding. High risk, speculative plays should make up only a small portion of your portfolio. Remember, over the last 100 years the stock market has roughly averaged a 10% return before factoring in inflation.
  1. Position Size & Diversification
    How you diversify should ultimately be determined by your tolerance for risk, age, and financial goals. The important piece here is to recognize the need for diversification and utilize the many online tools or seek the help of a financial advisor to help you with the specifics for your unique situation.
    Position size is likewise incredibly important and I credit this learn for the improved performance in my own portfolio. Not being over weight in one stock or sector can save you from disaster and is a trading fundamental I wish I would have learned earlier on in my investing career. No more than 5% in any one stock in a good guideline to begin with.
  2. Emotion
    This maybe should have been #1 in this list. Emotional buying, and certainly selling, has been one of the biggest reasons for lost money in the markets. Always have an exit or selling strategy before you even buy said stock in the first place. Mitigate risk and stick to your rules, and keep emotion out of it. This one takes practice.
  3. Cash on Hand
    Aside from your emergency fund, you should keep a good percentage of your portfolio in Cash. It’s not if but when the next crash will happen, and when it does, you want to scoop up quality stocks that were pulled down with the greater market. Everyone likes a good sale. When everyone else is crying about how much money they lost, you can smile thinking about the great bargains your getting on strong stocks that will indeed bounce back.
Stock Trading: When to Sell?

Stock Trading: When to Sell?

A good rule of thumb is to have a sell, or exit strategy for every fund or stock before you even buy it. Circumstances can change quickly, so it’s important to limit any losses and protect your gains. You might have a stock that is up over 20%, and another that’s down 15% leaving you wondering: When is it time to sell? There’s no one-size-fits-all answer here and everyone’s appetite for risk is different. Here are a few strategies to get us thinking about how to play the market in a smarter way.

Let Your Winners Keep Running

Sell your under performing stocks quickly for minimal loss and let your winners run. Not all stocks continue to climb higher and higher, but sometimes we have to reevaluate our original sell strategy if our stock pick turns out to be a winner. Seasoned traders sometimes use technical analysis and the are certainly many tools available to us to learn and use. If you’re relatively new to trading, however, I would suggest to start with the basics by learning and using two exit techniques: trailing stop % and stop limit (sometimes call hard stop).

I’m a huge fan of the trailing stop because it’s flexible, and designed to retain any gains. When a stock price goes up, the stop (sell) price goes up with it. For example, you buy Amgen stock at $100 per share, and immediately set a trailing stop loss for 20%. If the stock crashed tomorrow, you would limit your loss to 20%. Conversely, if the stock price continues to move higher, the trailing stop follows along. If your Amgen stock is now trading at $200, your trailing stop is still 20% thereby locking in an 80% gain.

A hard stop is just that; the price you predetermine to sell at should the stock fall in price. You will minimize losses, and be unable to cling on hoping for a rebound that may never happen.

Scrape Some Profit

For your trades that are doing well, you might want to take a little ‘cream off the top’. This means selling only a portion of you total share count. You can sell enough to fund another trade with a new stock pick you’ve had your eyes on, or sell off enough to completely recapture your initial investment. By doing this, only your profits would be in the trade, not your ‘skin’ allowing you to sleep better at night. There’s no way to know the absolute top trading price of any stock so why not lock in some gains.