Much of the recent panic selling in the stock market stems from several factors, including Standard and Poor’s downgrade of US debt from triple A to double A plus, slow moving economy, high unemployment rate, financial problems in Europe and of course our dysfunctional government.
It is no wonder that the markets are in a volatile state with wild swings that change from moment to moment. It is enough to scare any investor and cause anxiety and missteps when making poor investment decisions.
It is strongly recommended that an investor create a stop-loss strategy that monitors stock price movement and issues price alerts when a stock, mutual fund, or exchange-traded fund reaches a preset price alert.
There are many investment software programs that track and monitor investments along with price alerts. You can also create your own using Microsoft Excel, or for a free alternative, try the OpenOffice spreadsheet program.
I produce a report that monitors specific securities and flags potential problems, as well as when a stock or mutual fund hits a preset high alert. There are three levels that trigger an alert.
- 10% alert if price is below cost basis.
- Sell alert if the value falls below a preset percentage.
- High alert if price movement moves up.
If a high alert is triggered, I move the other two alerts up to protect my profits and reset the high alert as well.
In the event of a total market crash where the overall market moves sharply lower, even if securities reach sell price alerts. I can’t sell if the stock in question has a strong balance sheet or pays a dividend greater than 3% and that dividend is certain.
It is true that these quality stocks can drop significantly as they did in the fall of 2008 reaching a drop of 45% or more, but they recovered nicely once the market started to turn.
I would recommend that you sell if any specific stock falls to a target sell price if said company is speculative, does not have a strong balance sheet or high dividends to fall back on during a market downturn.
In a down market, if I own strong companies, especially those with a long history of paying dividends, I prefer to hold onto and collect the dividends rather than sell the stock and allow the earnings to sit in a very low money market account. . Trying to time the market and re-enter is extremely difficult, and in most cases, investors lose most of the appreciation once the market turns.
The most important lesson is not to panic during volatile market swings and keep a cool head.