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Even with 20 years of investing experience, days like Monday still give me ulcers. Emotions run high when the market opens and the Dow falls 1,000 points. So here’s the best advice I have when a market correction or crash occurs.
The very best defense is to be a long-term investor with a diversified portfolio. That diversification will protect you better than any other move. You just need to stay the course. Do not panic. The companies you bought are just as stable as before. You are in the market for the long term, and it is just giving up some of its recent gains.
Still, you have a chance to raise some cash and buy some stocks you’ve got your eye on.
First of all, if you have any speculative positions, exit them. The whole idea was that you were making these plays in a stable market, all others things being equal. The other idea is that you probably were in these trades because you couldn’t find value in new long-term positions. That is not the case now, so get out, whether you were long or short. You’ll be able to put money to work in long-term positions where your price target is going to get triggered.
Now, consider selling out of stocks where you have a 4%-8% loss. The reason is that you first get to grab capital losses that you can deduct against gains. Also, if the market is going lower, those positions will go lower as well. Sell now to buy back in at a lower price.
Also, think about selling stocks where you have a 4%-8% gain. This allows you to preserve capital without selling willy-nilly.
Put some cash to work by shorting the market. Why not make money as the market moves lower? Think about these: ProShares Short S&P500 (NYSEArca: SH), ProShares Short Russell2000 (NYSEArca: RWM) and ProShares Short QQQ (NYSEArca: PSQ). This also acts as a hedge for the rest of your portfolio. Be sure to set a 7%-8% stop-loss on these trades. If the market bounces back big time, you won’t get hurt too badly on the short. If there are little rallies here and there, you’ll still be in the trade.
As for buying, there’s no easy answer as to when to pull the trigger. Do not do it all at once, though. If you normally buy 200 shares of something, buy just 20. Nibble here and there. Scale in gradually.
When it comes to closing our your short position, as with purchases, don’t cover all at once. There’s very little chance you will cover at the exact bottom. Cover in little pieces.
My shopping list during this crazy period consists of Apple (NASDAQ: AAPL) under $100, Amazon.com (NASDAQ: AMZN) under $400, Visa (NYSE: V) under $60, MasterCard (NYSE: MA) under $80, The Walt Disney Co. (NYSE: DIS) under $95, Southwest Airlines (NYSE: LUV) under $32, and any big energy name if oil hits $30 or lower.
How to sleep easy at night
Is the economy keeping you up night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes. Find out how right here.