Marc Cuniberti: Stops & strategies for investors
June 17, 2018
How does an investor preserve gains they have made when markets fall? Knowing how to deal with market falls, fits and spurts is key to preserving capital and saving what you may have made in market rallies.
Since we are all in the market to make more than we originally had, keeping gains when you have them as markets fall is akin to making sure you don't just give it back when Mr. Market throws a hissy fit.
Since one never knows when the market will fall, by how much and when it will stop, having a strategy of some sorts is a prudent idea.
Finding the right strategy
There are many strategies and most but not all involve selling out either partially or entirely when your trigger points are hit. Trigger points are just mental milestones where you have agreed to get out in some way or another and/or adopt a stance that may not get hit so hard or may even gain when the overall markets fall.
One strategy might be a percentage point where one could agree that once the portfolio has gains, when the gains are lost by 50 percent (or whatever the point it) you just sell out your account entirely. That's a simple strategy anyone can implement, although it may not be the best.
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Let's say you started with $100,000 and it gains $20,000 making your portfolio worth $120,000. If the value falls to $110,000 you sell out.
You could also tie the trigger to an index such as the Dow Jones industrial average or Nasdaq or whatever. The percentages could be anything you selected and there is an infinite number of combinations you could adopt. The key here is whatever method you decide on, the reason you are doing it is to retain at least some of the gains you may have made.
Another method could be partially selling out some stocks instead of a complete sell out. One could also convert more and more into cash if the market sells off. As cash increases relative to stocks, the portfolio experiences less and less overall volatility.
An investor could also start swapping out stocks for fixed income investments (bonds or preferred stocks to mention but a few). Fixed income, although no guarantee they will offset market routs, historically they have been regarded as "anti- stock market," if I could use such a term.
An investor could also buy inverse or "contrary" funds. Some call these "Bear funds" which attempt to gear negatively to the market, meaning they may go up when general markets go down.
No matter what method one considers, the point is to not give all your gains back when the market sells off and protect the portfolio from a devastating set back. An experienced financial advisor can discuss a variety of protections enabling you to perhaps sleep better at night knowing your money is at least somewhat defensive in posture if things go south.
Keep in mind, investing involves risk in exchange for the possibilities of gains and although there are a variety of methods available to help protect you, there are no guarantees that they will work as planned.
If an investor cannot accept any risk, U.S. Government guaranteed savings accounts, bank CD's and things such as U.S. Treasuries and other debt instruments are available.
This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. He is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at 530-559-1214, or SMC Wealth Management, 164 Maple St #1, Auburn. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. Indexes may not be invested into directly and consider consulting a qualified financial advisor if you have any questions or concerns and before making any investments decisions.