A trait that most people find impressive is the ability to remain calm under pressure.
Think about who we look up to…
Politicians who lead during a disaster. Police officers, firefighters and paramedics who can tune out the chaos around them to accomplish what needs to be done.
And let’s not forget the parents who, when faced with their child’s health emergency, are able to reassure the child and keep him or her calm, despite their own worst fears.
It’s not just the ability to give a speech, spray water on a fire, throw a football or speak soothingly to a child that makes these people exceptional.
It’s the fact that they do it when fear and outside forces would make the task impossibly difficult for most people.
For some reason, investing is different. I’ve seen people act like rocks in the face of serious family crises yet panic during a stock market sell-off.
At some point, we’re going to have another serious downturn in the market. I’m not talking about what happened over the past few weeks. I mean an honest-to-goodness bear market or even an outright panic like we had in 2008.
It happens every so often. It’s part of the natural cycle of markets.
But investors who can hang in there during a market collapse stand to make a lot of money by following these three steps:
- Position your money properly – If any funds that you need in the next three years are invested in the market, take them out. You can’t afford to lose that money if it’s needed to pay the mortgage, healthcare premiums or college tuition. Your long-term money isn’t affected by a market meltdown. Who knows where the market will be five or 10 years from now? Think about if you were invested in 2008. In five years, you were made whole. But if the $10,000 you invested in the market is needed to pay next year’s mortgage and it’s now worth only $5,000, that’s a problem.
- Use stops – The Oxford Club is an advocate for using trailing stops. That way you protect your profits and don’t let small losses become devastating losses. During market collapses, it’s very easy to justify removing your stops because nothing fundamentally has changed in the company and no one wants to get stopped out because of other people’s panic. But you put your stops in for a reason, and you did it without emotion. Removing stops during a market sell-off is usually an emotionally driven response and is almost always a bad idea. Stick to your stops.
- Keep a “market sell-off fund” – Always have a stash of cash to be deployed when the market is tanking. Will you catch the bottom? Probably not, but you’ll pick up some stocks that you’ve had your eye on for cheaper than you would have earlier. This money should be used only when the markets look awful – when there’s panic in the air and the proverbial blood in the streets. It’s going to be very scary to buy when everyone else is selling, especially when all of the news is bleak and the media is trying to frighten you. But in a few years (and likely sooner), you’ll be very glad you did.
Again, look back to 2008 and 2009. I bet you wish you had deployed a bunch of cash into that market. It would have been uncomfortable. People would have told you you’re a few beers short of a six pack, but it would have been the right thing to do.
The tough part about a steep market sell-off is that no one knows when it’s going to end. And it often seems like it never will. Many times, I’ve facetiously said to colleagues, “This market is going to zero,” in the midst of a big drop. Because that’s what it felt like.
But if you can remain calm, channel your inner Peyton Manning and step up in the pocket despite all hell breaking loose around you, you’ll wind up both financially and emotionally better off. And you’ll be the envy of your friends, who are amazed you can be so unruffled while everyone else is freaking out.
MarcHow in the World Did the CEO of a $3 Stock Do This?? [sponsor]
He made a $450 million deal with Nokia... a $395 million deal with Microsoft... an $828 million deal with Cisco... and a $29.26 BILLION deal with Apple. How did the CEO of a stock trading for just $3 do it? And just how high will the stock go as a result? The incredible story here.
Source: Wealthy Retirement