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5 Golden Rules to Help You Avoid a Stock Market Crash
Boy…it’s easy to lose money in the stock market when it’s going down! Why? Stocks are falling 3 to 4 times faster than they are rising. So you are likely to lose much faster and therefore shy away from thinking it will come back when you should have sold. And because we talk ourselves into saying “we’re in it for the long haul,” we freeze and let it happen. But here’s the catch, you don’t have to be 100% invested in the stock market to be “in it for the long haul.” We just have to know when to get into the market and when to sell.
Our biggest problem when it comes to investing
The problem for many begins when we trust too much that the returns are always there for us, and at the same time assume that we can be successful as long-term investors if we just throw money into a mutual fund and hold it forever. Unfortunately, this attitude gets us into bad situations and can easily be avoided with a little knowledge.
To do this, we need to be more active in our investments, because in the end, we’re the only ones who really care enough about whether we retire rich or not. You work too hard for your money to afford anything less.
Here are some steps you can take next time:
1 – Educate yourself. Just because you didn’t go to Harvard or study finance doesn’t mean you can’t learn how to invest. You can also seek advice from your discount broker who has classes and webinars around your schedule, or subscribe to a monthly personal finance magazine like Money, Kiplinger or Smart Money, or pick up a copy of my guide and read this blog with I strive to help others learn how to invest and uncover investment strategies that can help you achieve your retirement goals. No matter where you get your information, the ultimate goal is to develop an investment plan; one that is more than throwing money at the latest and greatest fund and hoping it grows.
2 – Learn when to get out. In previous posts I have talked about watching a simple volatility indicator like the VIX to know when to exit the market and when to come back. Volatility is very important to learn to avoid falling markets. You see… as stocks move faster, their volatility rises. And since stocks generally fall 3 to 4 times faster than they rise, market volatility, as measured by the VIX indicator, rises when the stock market declines. When the VIX gets above a certain number, I sell. It’s so simple. And when it gets below a certain point, I go back in. It’s not perfect, but I avoid a lot of market corrections and emotional headaches.
3 – Exchange Traded Funds (ETFs) should be a primary part of your portfolio allocation. You can’t afford junk fees and management fees from stock mutual funds that drain your portfolio over time because 80% of them fail to beat the S+P 500. That can mean the difference of several hundred thousand dollars in your investment lifetime. If your mutual fund isn’t beating the market after fees year after year, find an ETF with a similar investment objective to your mutual fund and consider making some changes.
4 – Always use a stop program. Another benefit of using an ETF is that you can use a stop program that automatically gets you out at a set price or percentage. So if you are only willing to risk 5%, 7%, 10% or more of your money, all you have to do is start a stop program (ask your broker how). This way you can set it and forget it. Don’t let your emotions control how much you should lose. Remember, you can always come back later.
5 – Don’t forget about diversification. Our national debt is nearly $10 trillion. What this means to you is that as the government adds more debt, the dollar weakens. As the dollar weakens, your money is worth less. You can counter this by investing in overseas ETFs. But be careful. Look for markets that intend to rise more than in the past and always use a stop program. Otherwise, markets may punish economies that intend to grow less in the future, whether it is from 2% to 0% as in the case of the US, or from 10% to 7% as in the case of some higher growth economies.
If you are afraid or frustrated with big investment losses, it is a sign that you need to have an investment approach to managing your money. It’s not hard to get on the path to building and maintaining wealth. But it takes education, effort and action on your part. These 5 golden rules and some of my blog posts should get you started in the right direction.
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