There’s a lot of crazy stuff going on in the world right now. Ebola, drama in Ukraine and ISIS in the Middle East have all contributed to an extremely volatile stock market. I recently came across an article about how you as an individual investor should deal with the turbulent stock market and actually make it work for you.
The article compared navigating through the current chaotic situation with driving a car through difficult traffic. With investing, people can think about stocks in terms of where any particular stock might be headed longer-term, not in just the next minutes, hours or days. This important ability, to focus on the horizon in driving as well as investing, could help us ride out some of the distractions or “noise” that interfere with our ability to assess the real opportunity that an investment could represent.
It’s essential to appreciate the larger issues of our economy, whether those are related to the impact of healthcare reform on profits and businesses or the direction of interest rates and what is happening not only in the US, but around the world as well. This big picture will help us decide whether we should be more concerned with inflation or deflation, or 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. To understand the implications of Wall Street, it never hurts to understand world events as well.
While you’re investing, you need to constantly monitor the market, the prices of commodities and the ever-changing impact of political and world events on stock markets around the world. Find a good source that will help you identify new names and companies, but no matter what source you use, find a way to identify new opportunities and new threats to your portfolio. You should consider using an investing app on your smartphone, enter all of the stocks you’re monitoring and regularly flip through their charts.
Having an exit strategy is vital, so that you can limit your losses and preserve your gains. That means selling losing stocks quickly and occasionally selling gaining stocks, but slowly and partially. When your portfolio starts to show losses on holdings, you should consider this as a good indicator that you should be parting company with these losing equities and moving your portfolio towards cash. The majority of investors don’t want to sell stocks that have incurred losses through price declines, probably because they view the loss as nothing more than a paper loss. When you lose, take it on a disciplined basis, and remember that every stock that is sold creates the cash that can be the basis for a new investment, which could end up behaving much better in the long run.