It is possible to avoid Giant Stock losses but as with everything, there are pros and cons.
Examining “what if” scenarios in retrospect can only serve to prevent you falling in the same mistake in the future. Most stock market investors will be asking themselves if there is a way to avoid being crushed in the future by a situation similar to Thursday’s one thousand point flash crash.
The answer is yes, it is possible but each scenario has its drawbacks.
Setting an asset allocation which is reasonable protects you from potential market meltdowns. Your exposure to stocks is the best way to defend yourself from becoming a casualty in a giant stock loss situation.
If, for example you had invested $100,000 in a large core fund company at the end of April, you’d have experienced a 6.6% loss by the end of Thursday, or in other words you would have suffered a loss of $6580. Large company core funds are stocks in companies who have market values in excess of $10 billion. Companies that are growing yet selling at reasonable prices in relation to earnings are coveted by managers.
Investing in money market funds or bonds can also help protect your losses drastically. Diversifying your investments goes a long way in ultimately protecting you. In the previous example, if you had invested 60% into a large company core fund and 40% into government bond fund, your losses would have been reduced to less than half or in other words only 3.2%.
A proven way of determining how much of your portfolio should be invested in stocks is to deduct your age from 100 to get a percentage. This percentage is indicative of how much your retirement portfolio should be invested in stocks. For example a 40 year old person should have 40% of their portfolio in bonds with the remaining 60% invested in stocks.
This does have its drawbacks though and just as a 30 year old person may not need 20% of their assets in bonds, a 70 year old individual may not need 20% of their portfolio in stocks. Nonetheless this process is a good way to start.
The next factor in avoiding giant stock losses is your level of tolerance to sustain short term losses. If you were financially ruined on Thursday this could be an indication that you overinvested in stocks. If you were in the process of buying stocks when the market plunged this would indicate you didn’t invest enough.
Another thing you should consider if you want to avoid giant losses is a stop loss order. Stop loss orders are basically instructs your broker to sell when your stock reaches a certain percentage in loss, for example if you’re training a stock at $100 and you don’t want to lose more than 10%, your stop loss order would instruct your broker to sell if the stock reached $90.
Stop loss orders have a big drawback: As soon as a stop loss order becomes a market order when it reaches its trigger point. It will be sold for whatever it can get on the open market. What this means to you as an investor is that in a chaotic market environment your stock may sell for far less that your stop loss price, e.g. if your stop loss price was $90 your stock may sell at $85 depending on the market.
As stock increases in value, you should set your stop loss order accordingly. ExitPoint.com and SmartStops.net are two online sites that offer valuable resources and advice on how to set your stop loss orders.
Last but not least, a good way to defend yourself from giant stock losses is to avoid investing in inverse ETFs, or stocks that rise when there’s a fall in the market and vice versa.
It is wise to avoid these stocks because not many investors are adept enough to trade in these funds quickly enough in a chaotic market. As long term investments they do very poorly, especially the ones that claim you will get double and triple inverse returns on them. A good example of this would be the Direxion Large Cap Bear which rose to 9.7% on Thursday but was down 59.9% for the past year.
Latest Finance Trends
Related posts:
- Stock Market Options and Effects
The price of a stock in the stock market changes based on supply and demand. If more people wish to sell it than buy, then there is greater supply than... - Types of Stock Markets
Stocks are traded on exchanges, places where sellers and buyers negotiate a price. Exchanges can be physical locations where transactions occur on the famous trading floors. Exchanges can also be... - Guide to Employee Stock Options
Some companies will offer their employees stock options on a contractual basis. Usually, employers will provide these stock options to employees privately, and they comprise a portion of the employee’s... - Understanding the Stock Market
Insider information in a stock market is defined as illegal trading by individuals who have access to non-public information and who attempt to profit from such knowledge. Insider information is... - Creating Income in Retirement
If you are preparing for retirement, one of the largest adjustments that you will face is that your regular paycheck will stop, causing you to rely on other income sources....
