COVID-19 spreading throughout the world has shaken up the stock market. In the first weeks of the virus hitting the US, the market plummeted, starting a bear market. For a while, there was a rally in stocks as people began trading again. However, the market is going to continue in a bear market, with little upswings, until the worst of the Coronavirus situation is over. If you want to protect your position and lose the least amount of money during these downturns, consider the five ways you can protect your investments.
Reassess Risk Tolerance
What was your risk tolerance before COVID-19? You may have some significant losses because you had higher risks stocks in your portfolio. There are two ways to consider your movements in the market. The first is that you sell and take your losses to avoid the higher risk portfolio. The second is to ride the tide, knowing losses will continue, but eventually, the market will return to the bulls.
COVID-19 is something we have not dealt with within our lifetimes. It is unknown how long the virus will continue to spread, what the current numbers of infected are, and how many will end up dying from it. We also don’t know how long it is going to take for a vaccine that works on the S and L strains of the virus to be available. Projections tell us this will be over a year, with a continued spread throughout the summer months.
Staying in a position where you are losing each day may create a position where you lose the entire investment if you wait out the downturn from the virus. How much can you afford to lose? What are you willing to lose?
Let’s say you have $100,000 in one investment. You lost ten percent the first week; now you are down twenty percent. If you lose another ten percent in the third week, and it continues in that same pattern, in ten weeks, you will lose the entire investment.
Assess if you are willing to lose the entire amount. Examine whether you have gained a little back on the small upswings we’ve already seen.
Overall, if you want to protect your investment, you need to look at the highest risks and consider dumping those and finding lower-risk options.
But, for this suggestion, focus on the risks you may encounter and what your risk tolerance number is.
Create a Financial Cushion
In a bear market, it is easy to lose your money. If you are not a person who invests in options or sells when the market is down as a way to open a position, then you want to look at your portfolio for how you can ensure you will be able to keep your money.
You will need to retrench your investment portfolio. You already assessed what a low, mid, and high risk is. Now, you need to consider what positions you are going to close to ensure you have a financial cushion.
Salary cuts, delays, and unfortunately, a sputtering economy are going to take the money you are making and reduce it. You may need to rely on your investment portfolio to pay the bills until the virus is over.
You want to prepare for the worst and ensure you have an adequate buffer if it happens.
With the virus running around, it is best to have a full year of expenses saved up. If you do not, then you may need your retirement or investment funds. You don’t want to incur more debt by starting new credit cards, loans, or getting other financial help.
There is nothing wrong with closing risky positions and looking for low-risk choices. Certain stocks are going to have more stability through troubled times. Google, Amazon, grocery store stocks, and the medical industry are seeing improvements while certain things like crude oil prices are down.
Trading out of stock is not always the best choice, but sometimes it is the only way to prevent further losses and get into a more stable position. No one can tell you what to do. However, you know you want to have money to spend should your wages end. You do not want to lose an entire portfolio of investments because you held your position through for the long-term but lost it in a month.
When it comes to creating your cushion, keep the money you have yet to invest in the holding account. Do not look for new stocks.
Drop the stocks that are cutting away at your investment too quickly based on your risk assessment.
Watch the Market and Prepare
There is no reason you should avoid looking at the market. In a bear market, there are still ways for you to invest. You just need to find them. What stocks are recovering? Where are bigger investors turning to keep their money working? What shares are they holding?
You can always watch the market to discover what type of position may be the best investment for the current economic climate. Many advisors are still working from home and can be reached via phone and email. If you are not someone who personally takes care of your investments, then reach out to your financial advisor. What do they suggest? What do they see in the market?
Right now, mutual funds like Vanguard have shown losses, but the stocks also recouped some of the money lost. A compilation of funds can sometimes be the better option for stability because while some companies may be underperforming, others are remaining stable or increasing.
Again, you want to speak with your financial advisor or look at how the market is acting during the bear session.
Sometimes, when the risk is too great, you just want to watch so you can move when things turn more favorable. You might need to liquidate quickly to avoid huge losses or remain steadfast. But if you are not watching at all, that is when the biggest losses happen.
Keep Your Fundamentals
Coronavirus is a new concept. However, a rocky bear market is not new. We saw significant losses in the early 2000s with the housing market and the eventual recession. During times of economic troubles, no matter the reason for them, you want to assess the fundamentals.
Most of the time, you look for stocks that are on their way up from a dip. For example, a stock that rode the upswing until it hit the resistance line is something you wait to see hitting the support line so you can invest, ride the tide, and make money.
In a bear market, the dips can backfire on you. The trend, instead of going to the resistance line, creates a new support line or a reverse resistance position. Trading on the lower movements can be of help.
You have two options when you invest, buy, or sell. You can open a position by selling a stock. When you do this, you believe it is going to continue in the downswing, so you make money on it if it continues to go low.
For most investors, this is weird and confusing, so they will instead buy when they see a stock heading up in cost. The bear market requires a different attitude but also focusing on the fundamentals of trading.
Do not rely on just the technical trends. Today, the Coronavirus is causing job loss, economic stoppage, and a recession. The news being released, whether positive or negative, is affecting how investors feel about the market. You need to look at the fundamental information rather than the technical.
The reports from previous months are also not going to do you good. We all know the growth reports, unemployment, agriculture, and other financial reports are showing a decline and will continue to do so as the Coronavirus rampages the Earth. But what do the talking heads on the news make investors feel? Are investors buying or selling? As you look for the day’s update about the virus, what are investors doing?
You can protect your position by taking your money out of any investment and just keeping it in an account. You can move it to a savings account, providing a bit of interest. But, are these the right moves based on what you see other investors doing? Remember, protecting your position is also about keeping it going.
You may not want to invest in anything new and just sell the position you are in, and that is okay. Ultimately, your risk and the cushion you have to live on will decide whether you follow the fundamental news and keep going or wait until you see an improvement in six or eight months.
Setup a Comfortable Plan
You need to set up your plan. You will not base it on specific moments. Instead, you are going to look for opportunities, lower your risk, and protect your money. By assessing the first four ways to protect your investment, you should have a plan that tells you what you are most comfortable in doing.
You want a short and long-term plan. It is something you will stick with during the Coronavirus outbreak. Each day you will assess the health of your portfolio and make modifications based on the short and long-term plans.
● You do not want to try to catch the bottom of the market and invest.
● If you choose to stay in a position for the long-term, do not take your investments out. Stay committed to the investment returning after the economic upset is over. (Now, there is a time to get out. If the company news says the business is closing, if you see significant declines and you will lose your entire investment, or if anything indicates you will never recoup your money—get out. Otherwise, hold the position).
● For those who decide they are not going to invest during the bear market—do not look at your investments daily—check them weekly. You do not want to get down in the dumps or make a quick move due to panic. If you are holding and continuing to look at the losses and feeling depressed, the next thing to happen will be a quick move that costs you more. You want to have assets that are working for you, but in a bear market, nothing might be working. You must know when your asset mix is suffering because of the economy and when it is related to something horrible.
● Don’t change your strategy. Do not try a new approach in a bear market. You need to stay the same type of investor. It doesn’t mean you shouldn’t lower your risk. What this means is that you have a plan in place. You have steps you have taken to invest, such as mutual funds or other funds, so suddenly switching to invest in new techniques or attempting options when you don’t understand them, is not good. You won’t protect your position; you’ll ruin it.
● Don’t succumb to panicking and dumping your investments. You don’t want to make rash decisions. But, assess what is happening and make smart moves.
Too often, people lose their positions and their money because they do not protect what they have. They succumb to fear and panic and sell. The result is losing more than if they held their current positions. You want to follow the five suggestions to assess your situation, ensure you have a cushion, and then decide if you need to sell, hold, or change a short-term position. When you have a strategy in place, without attempting new concepts, you are going to get through the economic troubles.
Protecting your investments in a bear market requires you to keep a level head. Assess fundamentals, check your cushion, and act according to the new “normal.” No one knows how long the economy will be in upheaval or how long things are going to be shutdown. All we can do is continue to keep our heads.