Education
A Word About Your Investments In The Current Stock Market Environment
There is no point in stating the obvious. We are where we are and if you did not have stop losses for your investment portfolio in place before the dramatic decline in virtually every type of equity investment, the results are bound to look very ugly. How we let ourselves get here is a lesson for another day. The better question is where do we go as investors from this point forward?
Not to make light of the situation, but the answer is up or down. However, that answer pertains only to the market itself and, sadly, the direction it takes is beyond our control. What we do in the market, or whether we even stay in the market, however, is one decision that is within our control.
I watch with amusement as the self proclaimed investment gurus scream loudly at their TV audience, "never get out at the bottom." The problem is that we really don't know where the bottom is. Some pundits boldly pronounced that congressional passage of the bailout of the U.S. financial system would reassure the market. The market had other ideas. In fact, after watching the market absorb both its largest point loss ever, followed by its largest point gain, it is fair to say that emotion, not logic, is ruling the day. Good companies are still good companies, and there will be plenty of bargains to be had when the situation stabilizes, but for right now, it is simply too tough to swim against the tide when that tide more resembles a tidal wave washing away the years of hard earned investment gains.
Some suggestions:
First, consider what this is doing to you. If every day is a turning into a gut wrenching exercise, you should consider whether you really have the stomach to ride the market down further, should that happen. By now we know all too well that turmoil in the market may continue for quite some time. At a minimum, it looks like we are in for some highly volatile market swings in the near term.
You missed your ExitPoints. You are now likely well below where you bought in and some or all of your heard earned profits have evaporated. You should still consider the use of trailing stop orders right now. That's right, although it is true that you could get bounced out with a further dip only to see the market turn back upward, bear in mind that it will take a lot more than a few good days to demonstrate that we have turned the corner. In assessing your own personal situation, you must consider the risk reward calculus, and remember Rule #1: Preserve capital and live to invest another day. If the market turns up, your trailing stop will too. If not, at least you've finally stopped the bleeding and you can sleep a little easier.
Stop thinking about what you have lost or how you are going to recover it. (Remember, it takes a much greater percentage increase to get back to your starting point than the percentage decline that brought you down to where you are now. Read further.) Here, past is not necessarily prologue (other than the unfortunate tendency to repeat the same investing mistakes). Set ground rules from this point forward ("I will not let my portfolio fall another 10%") and start on the slow road to recovery, even if that means exiting the market for a while. That includes you mutual fund holders too.
Do you have a 401(k)? If so, is it self-directed? If the answer to both questions is yes, you have much more control than you may realize. Your retirement plan is not a static asset. It needs to be managed just as carefully as your taxable investment account (in fact, some would say more, considering that investment losses in a 401(k) are not deductible). Apply a set of stop loss rules here too and, for gosh sakes, stick with them come hell or high water.
Evaluate what you have in your investment portfolio. Some companies will come back. Others never will. Ask yourself if the reasons you bought the stock in the first place still apply? If not, get rid of the clunkers and reinvest your money in all the good company bargains that will be out there when the waters calm.
Finally, I'd like to share some sample feedback I recently received from ExitPoint users that are apropos to the current market situation. One writer, who chose not to subscribe after the free trial period, provided the reason: "Your system is overly simple. It's purely mathematical. How can that possibly work?" Beyond the point that simplicity and effectiveness are not mutually exclusive, ask yourselves this question: "If I had applied a disciplined set of stop loss rules using arithmetically calculated trailing stops customized to my own tolerance for risk, where would I be now?" Remember that for next time. Also, remember that simplicity sometimes is the easiest way to ensure that a system will be utilized. The most sophisticated and complex system in the world does one no good if you ignore it.
The second ExitPoint writer wrote: "Your system seems to work really well. I only wish I'd followed your advice." Enough said. Now here's one final answer: $120 = untold thousands. What's the question? What it would have cost you to subscribe to ExitPoint and how much you would have saved. Lessons learned.
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