As of this writing the stock market is slowly heading south from its record highs. It is still confused by the unfortunate truth that Ben Bernanke revealed about “reducing” the feds bond buying spree – and later back peddled to avoid exactly what is starting to happen. Big Ben let the cat out of the proverbial bag, and the market didn’t like it one bit.
Many believe that buying $85 billion in bonds a month for “Quantitative Easing” was a fool’s errand from the start. There is great uncertainty about how many jobs the easing has created, but it is certain that it has crippled seniors and the unemployed who depend on savings interest to help sustain their existence.
Throughout, the U.S. has been forced to print money, and borrow even more money to pay its overblown debts.
We are hastily approaching a debt load of $16 trillion in an economy that continues to sustain massive unemployment.
Many would-be-hard-working citizens have given up looking for work entirely, and our government is twisting figures and fiddling with a new national health program that is already in disarray, and will only add to the bewilderment of employers and the citizenry, and further attenuate any sustainable recovery.
You are probably flabbergasted and frustrated by our leaders in both parties – as you should be.
The band plays on
Nevertheless, the economy limps along and government numbers indicate small “improvements” in all economic sectors – but without a maintainable and robust economy, how long can the market continue to improve?
When the market corrects
With all the above going on, you may be uneasy with current stock market valuations. The recent dip caused by Ben’s slip of the lip, I fear, was prophetic and just the beginning of our troubles. It may be time to think like a survivalist.
If you had followed my earlier advice and continued to invest during the darkest days of the recession, you are likely sitting on a tidy pile of profits. It may be time to protect them.
Stop your loss and protect your gains
If you own ETFs and individual stocks consider putting in stop loss orders with your broker. Stock loss orders are designed to limit losses and/or lock in profits and execute only if your stock hits the stop loss price. For example, the current market price for XYZ stock may be $100. You paid $50 for it in 2008. If you place a stop loss order for $90, and the market for XYZ crumbles, your shares will sell when XYZ hits $90.
One caveat – in our example, the stop loss order does not guarantee that you will get $90 when the equity sells. What it means is that once the stock hits $90 a market order is placed to sell the stock. If the market is sinking quickly, you may get less than $90, and how much less depends on how fast the market for that equity falls.
Limiting the stop loss sale
You can also direct your broker to limit the stop loss order. Using our example, you place your stop loss order at $90, but if you do not want to sell your stock for less than $85, you advise your broker to put a limit of $85 on the order. If the price of XYZ drops precipitously, your stop loss order will not execute if your stock quickly drops below $85. Now you are guaranteed that you will get somewhere between $90 and $85 for each of the shares you sell – if they sell. However, using the limit order may result in your stock not selling at all.
The market always fluctuates so give yourself a little breathing room so you do not sell your stocks at the next small fluctuation. Pick a price that gives you comfort and will save a reasonable amount of your profits – or limit your losses – from disaster should the market collapse, which could happen at any time.
The stop loss precaution will cost you nothing if the market remains stable (unlikely) or dramatically increases in the near future (also unlikely unless exuberant buying reigns, again). You can ride any "bubble" by raising your stop loss price as the value of your stock increases. You will owe commissions on the sale only when it is consummated.
The buy-and-hold investor
If you are a true buy-and-hold investor, and have the time and nerves of steel, you may just decide to ride out the next market correction. The market will undoubtedly recover from any decline, but the question is “How long will it take?”
One big advantage of being a buy-and-hold investor, is that you never miss the initial upswing of a bull market.
Mutual fund investors
If you own mutual funds you have no option, but to watch the market like a hawk. Because mutual funds trade at the end of the market day, it is possible to sustain significant losses in just one day. You might want to consider selling at least some of your fund shares that have greatly appreciated.
It’s time to consider your options to protect your market gains.
Good luck in whatever course of action you decide to take.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as tax or legal advice. Before you act on anything you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options.