The stock market has been a long-term investor’s dream, with a record string of steady gains and almost no volatility. That is, until this week, when extreme stock market volatility has rattled investors every single day.
But did the markets really change? Is the stock market no longer the greatest wealth-building machine ever devised? This week is actually an excellent time to look at your strategy and pick up high-quality stocks at fire-sale prices.
That seems like a tall order, especially when the Dow Jones Industrial Average swings higher and lower by 500, 600, 1,000 and more in a single day.
However, it’s the type of environment in which Money Morning Chief Investment Strategist Keith Fitz-Gerald says the real money is made.
If you’ve ever panicked or felt the fear, Keith offers three simple steps to stay ahead of the turmoil and come out the other side with an energized portfolio.
Steep market corrections are short-term because they are related to short-term changes in market conditions.
Today’s trading computers rapidly adjust. As long as there is no systemic risk – like we saw during the 2008 financial crisis – capital will come rushing back in when things calm down
Don’t be scared, be proactive.
In fact, Keith’s been talking about the growing case for a correction for weeks. As of Thursday’s trading the Dow reached the 10% correction mark, while the other major indexes are close behind.
Even if you haven’t taken steps to protect yourself yet, it is not too late. There is always time to implement your safety strategy and get your investing back on track.
Here are Keith’s three steps for weathering extreme market volatility any time it hits…
How to Survive Market Volatility, Step No. 1: Prepare Trailing Stops
Trailing stops are mechanical sell orders placed below the current trading price of a stock or index. They are triggered automatically if the bears take full control.
What they do is lock in a certain amount of your profits but keep you in the game for the rebound when it finally arrives.
Setting stops is a personal preference, but most people will enter automatic sell orders 10% or 15% below the best levels traded. As the stock goes up in price, you raise, or trail, your stops higher with it
You may get shaken out of an otherwise good stock, but you will never ride a bad stock all the way down.
Plus, if you do get stopped out, you will have a pile of cash waiting for the recovery.
How to Survive Market Volatility, Step No. 2: Prepare Your Buy List
If you love a company but think it rallied too far, making it susceptible to a big pullback, here is your chance. If your stock dropped 10% or 20%, would you jump on it? After all, if you like it for the right reasons, such as business model, earnings growth, and market dominance, wouldn’t it be great to scoop up shares when everyone else is panicking? Buy low, sell high.
Even king investor Warren Buffett said “buy when everyone else is fearful.”
Keith’s list of Unstoppable Trends is a good place to start. Game-changing technology will lead the way back.
How to Survive Market Volatility, Step No. 3: Reorient Your Thinking
Because 80% or 90% of trading is now computerized, things happen very fast. You may not get the chance to act on your new strategies, so it is crucial to be prepared ahead of time.
Don’t buy stocks just because they fell a lot in price. Buy quality stocks that were doing well, and then had their corrections. Capital will come back to them.
Source: Money Morning