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Posted by in The Money, Honey

Investing: Yikes!

Investing: Yikes!

As I write this, the stock market is more exciting than an E ticket ride at Disneyland. (Okay, do they even have E ticket rides at Disneyland anymore or am I dating myself?) Anyway, you get the picture: volatile, tumultuous, up and down, triple-digit losses becoming more and more standard.

As my brother use to say: “Yikes!”

So today we’re going to talk a bit more about what to do when the stock market turns on you. What are your options? How can you protect your investment assets, your stock portfolio against a sudden — or not so sudden — downturn in the fate of the stock market? We have talked about this in the past, but it’s one of those topics I think requires repetition, because we need to get our heads around the fact: THE STOCK MARKET WILL GO DOWN!

If you’re putting money into equities under the assumption they are only going to go up, I’m afraid you’re going to have a rude awakening. Or maybe you already have had this shock because you’ve seen your portfolio go down 10 percent or more in the past months.

The knee-jerk reaction to this, unfortunately, is to pull your money out of the stock market by selling when the stocks are down. I have a friend who lost nearly $200,000 in equities because he did just this: when he bought a stock, if it went down, he would panic and sell. Then he’d buy another stock, and if it went down, he’d sell. Eventually he was left with a pittance of what he once had. What should he have done?

My first question to him would have been: “Did you buy a good stock that just got hit with the downturn in the market?” If he said no, I would have told him to sell it and find something really, really good, with solid financials and good prospects for the future. If he said yes, I would have told him to sit on it and let it come back up when the market came back up (which it always does).

Instead, he kept throwing good money after bad, stock after stock, and then it seemed like he couldn’t do anything right! It was sad, and it affected his life, because he wound up having to move to a cheaper state when he retired, which I don’t think he would have chosen to do had he not lost a small fortune in the market.

Now you’re probably reading this and saying to yourself, “If it’s this risky, why bother investing in the stock market at all?” I can hear you; don’t try to deny it. The reason I know you’re saying this is because it’s probably what I would have said twenty years ago. But, as I’ve said over and over again in these columns, statistically the stock market is the best place to invest long term. So it pays to figure out a better response and plan of action than to cash in your chips and go to a measly 3 percent CD.

Okay, now that I’ve hopefully convinced you to stay in the market, remember what I told you to do when the market goes down? There are three choices: do nothing, buy more of the stock in question, or sell the stock. That’s about it. But make sure your decision is based on something more than panic. The worst thing you can do in the stock market is to panic: to sell off when the market takes a dive, and to buy when everyone else is buying.

What you want to do is what is called contrarian investing: you want to buy when everyone is selling as long as what you’re researching has good prospects. For example, bad news comes out about Company A. You research it and discover it’s temporary bad news, and it’s not even that bad. But the market is emotional and reacts accordingly. So you buy when the stock is selling off. You’re going against the grain, swimming upstream, being contrarian. (Drop that term – “contrarian” – at the next cocktail party. They’ll be impressed.)

On the other hand, Stock B has gone up, and up, and up. The news is nothing but good. The CEO is on the cover of “Business Week” and “Newsweek” and “Time.” (Always a bad sign that the stock or company has peaked.) You’ve made money hand over fist. What might you consider doing? SELL! Sell when everyone else is buying, because you’ll get the best price, and you’ll be counting your profits when the stock does tumble.

Be calm. That’s the key. Don’t panic. Take a few deep breaths. Don’t do what everyone else is doing … because everyone else is usually wrong. If nothing else, your blood pressure will stay in the healthy zone!

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