Investing: Hold On To Your Hats

The stock market is fragile. Any bad news, even a look askance, can bring it down very quickly, while any good news can also send it soaring.

It’s a double-edged sword, and it can be pretty painful when the sword edge is cutting your throat. (There’s also a saying on Wall Street: don’t try to catch a falling knife. Meaning if the market is tumbling, get out of the way as much as you can. And, sticking your hand out to catch a falling knife is not the smartest move to make.)

When the market reacts emotionally (which is weird, to attribute a human reaction to a nonhuman entity like the stock market, but it truly does react like a person sometimes — irrational and explosive), all you can do is protect yourself and your stock portfolio. A few bad days in the stock market can really hurt your returns for the year.

We’ve talked many times in these articles about what to do when the stock market tanks, but what do you do when the market is like a roller coaster ride, up 100 points one day, then down just as many points the next? When it is this volatile, is it smarter just to sell and sit in cash, knowing the vagaries of the stock market can’t hurt you?

Yes and no.

How’s that for an answer?

One of the reasons the stock market can provide such healthy and hefty returns is the risk is so high. As I’ve said before, if you want security or relatively no risk, put your money into a CD and forget about it until the CD matures. However, keep in mind this scenario rarely provides growth beyond the rate of inflation, which means your money is actually losing value over the long haul.

So here again are a few helpful tips regarding your stocks and investments when the market is full of surprises, volatility and nervousness.

First, don’t stay married to any stock in your portfolio. If you have a winner but it starts to go down, you might consider selling and taking profits.

I did this last week in one of my investment clubs, emailing the members and telling them what I wanted to do; I waited until I had a majority of the “votes,” and then sold off half of our position in a particular stock.

We took a nice profit, which meant we were left with the “house money” at no cost to us. So whatever profits the other half of the shares continue to make will be pure profit for us, which is nice.

This way, we can decide to sell whenever we want and still make some nice money unless we get stupid and let it run all the way down.

But my point is this: there should not be a stock in your portfolio that you absolutely can’t sell. They are all vulnerable in a bouncy market, so be prepared to take profits — or cut your losses — and get out with a smile on your face.

Consider buying/selling a stock on dips and rises. In other words, say you buy a stock at $50 and watch it rise to $75. You know the pattern in this kind of market for this kind of stock is to sell off when it gets to around $75. So you can sell it, then wait for it to come back down toward $50, and then buy it back again. And start all over — riding it up to $75 again.

There are even investing programs you can buy into which do exactly this. They “channel” stocks that have this pattern of up and down, guiding the investor (who pays money for this advice) as to when to buy and when to sell and when to buy back again, and so forth.

Go to cash if the market makes you really nervous. Hey, there isn’t a stock in your portfolio you can’t buy at another time, when things are more settled (when and if that happens).

The down side of this decision and choice is you might miss the move up of stocks you own, but the up side is you sleep at night.

There’s no point in letting the stock market make a nervous wreck of you, so if you don’t have the stomach for it and the market is like a roller coaster, don’t ride it. (That’s what I do when I go to Disneyland. I hold the coats and purses and sit on a bench watching the other idiots in my group run the risk of vomiting.)

So, be smart, then, about yourself and your risk tolerance. If you can’t stand the heat, get out of the kitchen. What other analogies and metaphors can I throw at you to make my point? THERE’S NOTHING WRONG WITH CASH WHEN THE MARKET IS UNSTABLE. That’s it, bottom line.

Bottom line: you can weather this kind of volatile market with a little patience, fortitude and a good battle plan.

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