Over the past five years of unstable markets, investors have learned some valuable lessons; some of these lessons were pleasant, some of them painful. After such a long period of stock volatility, media frenzy and other hysterics, investors should understand some things about unstable markets better.
Panic trading – Very little is ever accomplished when spurred on by greed and fear; both can be deadly to a portfolio, but this is especially true of fear. If you have followed a trading plan up to this point, don’t abandon it now. If you are following your plan, you will have diversified your investments, created stop loss strategies and done sufficient research to stay confident with your investment, even in an unstable market.
Establishing an investment level – Remember in an unstable market (or even in a stable one) that the money you invest is called “risk premium”. It is called that because it is the cost of doing business (or the premium) in the stock market; you are risking this money in hopes of making much more. Before making a single trade, you should decide how much to invest based on the idea of how much you can afford to lose.
Understand the market’s rise and fall – You won’t always be able to figure out why an unstable market moves like it does. Even those investors who make money investing in stock realize that the market can do crazy things. The recent fall in the China stock market happened with good reason; the market was up over 100 percent from the year before and speculation was at a fever pitch. In spite of this, there was no reason for the very best stocks on the Dow and S&P 500 to fall as well. This was simply a case of panic selling. If you are doing your fundamental analysis and stock charting, you will know if an unstable market is looking at a significant downturn and you can make wise decisions.
Know when to sell – Or maybe when NOT to sell. See an unstable market heading into a rough period? If you are confident with your fundamental and technical analysis you don’t need the cash in your hands, don’t sell. In fact, if you find some undervalued stocks in the process, maybe you should consider buying. While the economy of scale if vastly different, ask yourself if Warren Buffet is selling. If you’re not overextended, you might have the opportunity to pick up good stocks at value prices.
Suppose the downturn in this unstable market leads to a recession. In spite of Alan Greenspan’s recent comments, this is not a likely event anytime soon but for the sake of argument, let’s suppose there is one. In the past two decades, recessions have tended to be very short term in nature. As the economy moves toward a recession, the stock prices fall and this unstable market creates the opportunity to make some of your best stock picks. The simple cliché “buy low, sell high” actually has some truth to it; it is difficult to make much money when a bull market is pushing up prices.
Know where to get your information
It’s always reaffirming when the analyst on TV agrees with your theory about an unstable market but what does it buy you? If that $75,000 per year talking head were such an amazing expert on stock market advice, he would be making $250,000 per year as the lead investor from some brokerage house. It doesn’t take a crystal ball, just sticking with good, solid technical analysis and steady stock charting will give you far more solid information and a better sense of direction in an unstable market than someone on TV.
Diversify your portfolio
A healthy indicator of your stock holdings in an unstable market is if you have a diversified stock portfolio. If you hold equal investments in twenty different stocks and one goes under, what do you have? You would have a portfolio that is worth 95 percent of the original. Portfolio diversification prevents widespread destruction in your portfolio, even when the market is unstable.
Conclusion
An unstable market can still be a source of great wealth, if the investor is wise and sticks to his or her plan. Unstable markets move in a way that creates opportunities for smart investors. The key is to stay within your stock trading plan. Unstable markets can be a great source of income if you take the time to find the winners.
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