How to Survive a Volatile Market
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In this week’s Stock Market Video, I survey the damage from the market’s continuing January plunge. There are plenty of reasons for the correction, China chief among them, but the reasons aren’t that important. The urgent advice is to commit yourself to protecting the value of your growth portfolio by selling losers, taking partial profits in winners and reducing new buying to a minimum. It’s a hard market to make any money in. I give a few stocks that are on my watch list for future consideration, but advise that you keep your finger away from that “Buy” button.
How to Survive a Volatile Market
For those of us who grew up in the 1950s, the phrase “duck and cover” will always have a certain resonance.
That was the survival tip that was drummed into the young heads of kids during the height of the Cold War. It was repeated over and over, and sung in jingles and seen on television. “If you see a flash, duck and cover.”
During air raid drills, children in schools practiced how to crouch under their desks or get down next to an interior wall. Adults were told to build fallout shelters and stock them with enough food to last until radiation levels outside were low enough to survive. There were even larger shelters for the public, marked by once-familiar yellow and black signs.
I don’t remember thinking that there was anything unusual about all this preparation. It was just the way things were, and since I was living in a small town in southern Oregon, I didn’t spend much time worrying about whether ducking and covering would actually do people any good.
So, here we are right in the middle of a distinctly unpleasant market correction, with some analysts predicting the equivalent of a nuclear explosion that will wipe out equities.
Note: It’s easy to predict disaster. People are always ready to listen to the voice of doom. But dire predictions are always balanced by those who assure you that nothing’s wrong and markets will be back on their feet in no time. Don’t believe either the optimists or the pessimists. The only thing you can really count on is knowing what the market is doing right now, and reacting accordingly.
But in all the noise from predictors on both sides, I’m not really hearing the equivalent of “duck and cover” for perilous times in stock markets.
So here’s my suggestion:
“Sell and Tighten.”
That means you should sell any stock in your growth portfolio that hands you an unacceptable loss and tighten your stops for the rest. As a rule of thumb, you should set a maximum loss limit of no more than 10% to 15% on any growth stock.
The name of the game is capital preservation, and selling and holding the cash is the simplest and safest way to do that. Right now, Cabot Growth Investor, Cabot’s flagship growth advisory, has its Model Portfolio positioned 75% in cash.
After 45 years of experience in handling the toughest conditions markets have to offer (including the two nuclear-grade corrections in 2000 and 2008) that’s the lesson Cabot’s growth analysts have learned. Sell your losers and hold the cash.
The “tighten” part means that you should narrow your loss limits and even the selling guidelines on your winners, selling out before your profit margins are gone, and even doing some preemptive selling to book profits and reduce exposure.
How will you know when it’s safe to come out of your equity fallout shelter again? The easiest way is to subscribe to a Cabot stock advisory like Cabot Growth Investor. (That also has the benefit of letting you know which stocks are best positioned to lead the new bull market when it arrives.)
But if you need a quick rule of thumb, just keep watching how the major indexes are performing against their 25- and 50-day moving averages. When the indexes get back on top of those averages (and the averages themselves turn up), it’s safe to come out of your safe place.
Sell and Tighten! It’s the smart way to survive bear attacks.
---Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s comment: Despite valiant attempts by manufacturers, and ever-increasing regulation by authorities, it’s still possible to hurt yourself with a lawnmower, a blender, even a screwdriver. And even though millions of people claim to follow wise investment advisors closely, human nature means that every one of us is susceptible to following a hot tip or a clever idea of their own.
Paul’s comment: My favorite version of this quip is “If you idiot-proof something, nature will just build a better idiot.” There aren’t many types of human endeavor that can’t be overdone, abused or willfully screwed up by a determined idiot. The only cure in the stock investing business is to learn a few simple rules and follow them. A few good rules can take the foolishness out of investing.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Tim Lutts, Chief Analyst of Cabot Stock of the Month, writes about Amazon’s latest wrinkle, stick-on buttons that allow you order frequently-used items with one touch. It might work … or not. Tim is looking for the next Amazon. Stock discussed: Amazon (AMZN).
Cabot Small Cap Confidential’s Tyler Laundon, our connoisseur of small-but-mighty companies with huge potential, runs through the top and bottom performers for 2015. Stocks discussed: Voltari (VLTC), DS Healthcare (DSKX), Recro Pharma (REPH), Cambium Learning (ABCD) and Impac Mortgage (IMH).
Cabot’s growth guru, Mike Cintolo, gives his thoughts on how to handle the market’s January meltdown. Mike looks at what the market might do next and how you should be managing your holdings. He has a few stocks on his watch list, but he’s mostly sticking to defense.
Have a great weekend,Paul Goodwin
Chief Analyst, Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory