Last week’s crash should still be fresh in your mind. It took place over the course of 3 days and wrecked havoc on many portfolios causing billions in losses. My portfolio also got hammered but I was not really worried about the paper losses, I was more upset because the little money I had was spent early in the slide so I was not able to buy as much as I would have liked! Here are 5 tips drawn from my experience that should help you survive the next correction and profit from it:
1. Know your stocks.
Do not buy a company stock because the name is cool or prestigious. Do not buy in because a friend tipped you it was going to be the next 10 bagger. Take the time to research a sector and get to know your companies before buying in. Go through their news releases, their annual reports. Call them with your questions. It is extremely important to be aware of why you chose to invest your money in the stocks you pick.
2. Never max out your margin.
If you have a margin account, you don’t have to use it all especially if you are a long term investor. Part of risk management is to keep a margin of maneuver in order to absorb any market drops without having to swallow losses. Stock prices can take a plunge in a matter of seconds especially when stop losses are being turned into market sell orders. If one of your stocks plunges, you will get a margin call forcing you to liquidate at loss.
3. Block your emotions.
Are you feeling you got infected by Mr. Market’s panic? Remind yourself why you invested in each of your stocks. When you buy a stock, write down in an excel sheet why you invested in it and what are you expecting from it in the near future. Keep rereading that excel sheet every time you feel the urge to sell before absorbing your double digit percentage loss. Remind yourself that in the end emotions in the market shift and prices recover.
4. Blame yourself for losses.
If you come out of a correction having sold at a loss, do not justify your losses by blaming Mr. Market. You have only yourself to blame. Investing in the stock market is risky; no one forced you to invest your money. By blaming yourself you are forced to identify what went wrong in your strategy and how you can avoid this from happening in the future. We will always be going into minor/major corrections, if you got hit badly by one, work on protecting yourself from the next one.
5. Keep money on the side.
Market drops are opportunities to pick up stocks on the cheap. In fact these would be your best buys compared to buying into a hot sector where your grandma, your brother in law and your neighbor’s dog are looking to buy into (Gold maybe?). At least keep your margin free, it gives you the buying power you need to capitalize on weakness. These will be your most profitable trades.
How about you dear Reader, what would you add to this list?
