Volatility is back in the market. Whether we are being tossed and turned by the Ebola crisis, Russian aggression in the Ukraine or the ISIL threat in Iraq, the stock market is a challenging place to be.
Here are five ways for an individual investor to deal with this turbulence.
Perhaps it would be helpful to compare the navigation through this chaotic environment with driving a car through difficult traffic. Years ago I recall a driving instructor explaining the Smith System for Safe Driving to a group of high school students preparing to use the automobile simulator.
In investing we can think about our stocks in terms of where any particular stock might be heading longer-term not just the next five minutes, hours or days.
This ability to focus on the horizon in driving as well as investing may help us ride out some of the distractions or “noise” interfering with our ability to assess the real opportunity an investment may represent.
2) Big picture
Educate yourself. It is imperative to appreciate the larger issues of our economy, whether it be related to the impact of healthcare reform on profits and businesses or the direction of interest rates and what is happening in China, Japan, Germany or in the United States.
The larger picture will tell us whether we should be more concerned with inflation or deflation. Whether a rise in the dollar will be good for profits and what the impact of the corporate tax rate will be on mergers and inversions.
It is always helpful to understand world events to understand some of the implications for Wall Street.
3) Stay alert
Just as in driving, we must continually monitor the market, the prices of commodities and the ever changing impact of political and world events on stock markets worldwide.
A great place to identify new names and new companies is the Investor’s Business Daily, which regularly summarizes stocks on the move.
But whether you read the Wall Street Journal or get an investment newsletter, find a way to identify new opportunities and new threats to your portfolio.
Consider using an investing app on your smartphone, enter all of the stocks you might be monitoring, and then flip through their charts regularly.
4) Exit strategy
It is very important to limit your losses and preserve your gains. That means selling my losing stocks quickly and completely and occasionally selling my gaining stocks–but slowly and partially.
When your portfolio starts showing losses on holdings, consider this a good indicator that you should be parting company with these losing equities and moving your portfolio towards cash.
Most investors are reluctant to sell stocks that have incurred losses through price declines. They likely rationalize that the loss isn’t real but just a paper loss.
Take your losses on a disciplined basis. Remember that every stock that is sold creates the cash that can be the basis for a new investment that may behave much better in the long run.
5) Be visible
This one is a personal reminder. That in order to gain more followers of my own strategy I shall continue to try to write commentaries both here and on my own blog.
To summarize, it is difficult to navigate a busy traffic system in your own car just as it is challenging to navigate a portfolio through turbulent market conditions.
Rules do help and your own philosophy should guide you even before you make your purchase of individual stocks. Drive carefully.
DISCLAIMER: Past performance is no guarantee of future results.