I received a lot of emails this morning from investors stunned by the 200 point drop in the Dow, especially on the back of such good employment numbers this morning and the big rally over the past two days. Most that emailed me felt that a small dip was possible as investors worried about interest rates rising sooner than most analysts expect, since the reports show continued expansion of the economy but nothing of this size.
The plunge also surprised me as well, but the difference is I have confidence in what the technical indicators are advising and I have cash sitting on the sidelines. When investing for big profits you have to fight your emotions and instead look at what stocks are strongest, what stocks are holding up well and what stocks you would own if the outlook is wrong and stocks are going to pullback.
I started my website in 2008 when the bear market was literally ravaging stocks. I was shocked by how many investors were selling out at terribly low prices. Even investor friends I had known for many years were doubting and many sold some positions that had been marked as long-term holdings. I built this site to show investors that there are other ways to build income and protect capital being used.
What had happened was their emotions had taken control. They were tuning in to the doom and gloom analysts. They were reading far too many opinion articles and definitely had seen their confidence shaken.
Fight Your Emotions With These Steps
The pullback at the start of 2015 has been, apparently from what CNBC indicated, the worst start to a New Year ever. That does not mean we are set for a huge plunge back to the depths of the last bear market. Instead it means this will be a volatile year. That also means profits can be better with less capital outlay as stocks will whip and turn more and option premiums, for those of us who enjoying selling them and trading in them, will be a lot better. Again, less capital is needed.
Every investor aims for big profits. The problem is our emotions get in the way and often those big profits become big losses. Here are some steps I learned decades ago which can help investors fight their emotions in the kind of climate we are presently trading in.
1. Stay with big cap dividend paying stocks. Especially those stocks that have increased their dividends every year. In particular check out the last bear market and make sure they did not cut or delay their dividend.
2. Stay clear or do not add to existing positions in commodity type stocks that are juniors or medium size companies.
3. Turn off the news. This morning’s terrorist news out of France has many investors on edge. Just check out the Dow pattern of trading as news flowed back and forth of what was happening. Investors are a nervous and emotional bunch. Remove yourself from that group. Trade with knowledge and logic.
4. Have your watch list of stocks at the ready and on big dips such as this morning, place offers at what are often called “stink-bids”. These are prices that normally would you not receive unless other investors were panicking. The same holds true with options. Place offers at prices you would be lucky to get.
5. Keep Cash Back. Always have some cash available to help rescue a trade. Having cash sitting ready to be used can keep an investor calm. I like to always keep some cash which I rarely ever use but I know in a pinch I have it there. This helps me to stay focused.
6. Take profits on trades. For those of us who love to sell options, there is no fast rule that says we have to hold puts to expiry. Forget that. Instead watch your option premiums. In a rally of the underlying stock keep a daily watch and wait for the day when the stock starts to turn back down. Close your trade then or close part of the trade. The same with stocks. Take some profits when there is a profit available. I know investors who buy 600 shares of a stock and will sell 200 shares for even a 50 cent gain and then sell another 200 shares for 75 cents. Remember that the goal is to protect capital being used and earn income, in that order. Protection of capital being used is paramount and key to growing your portfolio quickly.
7. Stay away from strategies and trades you do not understand or have little experience with. A volatile market is not the time to decide to “try out” a new strategy. Instead paper-trade to learn a new strategy or try out a new trade method and keep your capital safe.
Stay Safe and Stay Profitable
So remember the 7 rules above. These are rules I use every day. This is what FullyInformed.com is all about. Staying Fully Informed about investing, managing capital, preserving it and growing it through a variety of investing strategies. If you want to learn more consider becoming a member. If you have questions you can contact me here.
This morning I entered into 5 trades that I outlined earlier this morning before the markets opened. All of those trades are built around the 7 rules above with protection of my capital the most important aspect. 2015 promises to be volatile, but it also means it can be highly profitable and require less capital to be exposed to the market. Instead of losing capital, consider incorporating the 7 rules above and build confidence to invest strategically with a focus on capital preservation first and growing it second.
I plan on having a terrific year again in 2015 with protection of capital my main focus and growing it again this year, second. I believe all investors should consider making that goal their resolution as well.
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.