When the market turns against you, what should you do? Sell everything? We discussed that choice in a recent column. Selling everything draws your line in the sand and announces that you have determined there is no future for you in the market.
There are other steps you can take when things start moving against you. Here are 6 actions you take today to help protect the money you’ve worked hard to get. In my next article, I will share several more ways you can help protect your stock market and mutual fund investments.
1. Decide at what price you will buy the stock or fund if it pulls back. Take a long look at where the stock has been the last few months. Has it gone up without any kind of break? It may be due for a pullback. WRITE DOWN your reasons for buying and the ideal price youd like to own it at…and be patient. If you miss it, you miss it. Dont chase stocks.
2. Manage your stops. Re-examine where your stop orders are and decide if you can live with getting stopped out. These days, stop orders usually need to be renewed or revised every 60 days. If your stock has moved up nicely of late, you should move your stop up as well.
3. Buy puts on stocks. You may own a stock where you have a profit. You may really have no intention of selling the stock soon. But you know that the individual stock may have gone up too far, too fast. Buy a put on the position. It is considered protection on your original investment. If the stock falls, the puts should climb in value. This will offset the drop you have (on paper) in the underlying stock. And if youre right, and take a profit in the put, you may have enough cash from the put sale to buy more shares of that stock at a good price, now that it has dropped.
4. Buy half of what you would normally buy. You want to tread lightly in markets when the risk is high. Buy half of what youd normally think of doing. Youre automatically keeping more cash than usual on the sidelines, which is smart decision in a risky market.
5. Invest in a basket instead of an individual stock. Exchange-traded funds are a great way to do this. If you feel strongly that a current theme will work, but are unsure about the market, this may be your ticket. Thinking about swapping a single stock for a basket. Youll get diversified since you own a basket of names instead of one single stock.
6. When stocks start to fall, think about selling stocks short. Its not for the faint of heart, since being short leaves you on the hook, because your loss is unlimited. But remember, stocks dont just go in one direction. What makes it an interesting market is that stocks go up AND down.
One decision you wont see on the list is the choice to do nothing, and just sit it out or ride it out. Youve worked hard to get where you are financially, the last thing you should do is sit idle and let the market take your profits away from you.
There are other methods you can employ to help reduce the risk in your account, which we will get into in the next article. In the meantime, feel free to contact us, toll-free, at 877-223-7300 if you would like further information on how to protect your assets in a high risk market.