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.
- 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.
- 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.
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.
- 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.