“According to Paul Tudor Jones, the billionaire founder of Tudor Investment Corporation…. Instead of aiming for high returns, the hedge fund manager says protecting your money should be the priority. But if you still want to invest, he suggests one approach that might be worth considering…. ‘I’d say simple trend-following strategies’. Jones’ advice is clear. The trend is your friend.” Jing Pan, MoneyWise, May 4, 2022
Shaky is a polite way of saying Scary
Recently, in spite of a few up days, the market has been on an overall downward trajectory!
So, what is an investor to do? Here are 3 options:
- Buy stocks that are now lower in price.
- Buy stocks that are either still holding their own or rising, if you can find them.
- Do nothing – and wait to see what happens next.
What are the factors causing current market concern and the slide in stock prices?
To name just a few: higher interest rates, shocking inflation numbers, serious supply chain shortages, jobs going unfilled, rising energy costs, etc. This would seem to indicate that things will not be getting better soon, and may possibly get worse.
You might remember from a previous Tidbit, we pointed out that there are only 5 things that can happen after you buy a stock:
- It can go up Big
- It can go up Small
- It can stay Flat
- It can go down Small
- It can do down BIG!
From a risk point of view, # 5 is to be avoided at all costs.
If you’re a typical Buy & Hold investor, you probably have most of your investments tied up in a few big-name stocks or ETFs with no downside protection. As a result, you’re probably reluctant to even check your results. It’s too depressing!
That was us in 2000 and again in 2008, only worse. We would get our 401k and financial advisor reports in the mail and sometimes not even open the envelopes. We, like everyone else said, “after all what can we do about it? It will eventually come back. Right?”
Unfortunately, many retail DIY investors only invest in a handful of big name stocks, and/or ETFs. I say unfortunately, because if only one or two of those stocks fail to recover it could have huge negative consequences.
Don’t confuse “fail to recover” with “fail”. Based on years of experience, I can name numerous, once big name, high-flying stocks that endured a downturn, and never regained their prior stock price level, or it took 20+ years to do so.
Here are just a few:
- GE at $444 in July, 2000; May, 2022 the stock is at $75
- Cisco at $77 in March, 2000; May, 2022 stock is at $49
- Sears, the cornerstone of every suburban Mall; 2018 – Chapter 11
- And numerous others
The point I’m trying to make is that in a portfolio with a small number of stocks, one or two that fail to recover can take and keep your portfolio down.
Another big consideration, is where are you in your investment life cycle. Many pundits say, “if you’re a long way from retirement, it may hurt, but you have time to recover”.
Do you really want to give up that time which can represent years of growth? We did that. It is not a good strategy! (see The S&P 500 SPY ETF Case Study)
If you are already close to retirement age, the impact could be even more significant.
You may be asking yourself, “even if true, what can I do about it”?
No matter what investing strategy you use: Fundamentals, Momentum, Buy and Hold, etc., you need to Manage Risk!!
This is a cardinal rule of investing! Remember Rule # 1.
You can apply a very common practice used by Trend Followers every day. That is the application of the Stop-Loss order.
Having discussed this concept with other Buy & Hold investors, we know some of your concerns. One is how do you determine the size of the stop-loss.
People have heard many different approaches to setting a stop-loss, including but not limited to: a flat 10% or 15%; the 1% rule or the 2% rule, or using various moving averages etc. Confusing.
And confusion is risky especially when it’s YOUR MONEY that’s at risk.
There is a better way. Trending Stocks calculates a prudent stop-loss for every stock (both dollar amount and percent), based on the latest data for that individual stock, using a widely accepted moving average approach.
The Trending Stocks Platform was built for both Trend Followers and non-Trend Followers because of its unique focus on Risk Management.
If you visit Trending Stocks with a particular stock in mind or you have a list of stocks you are interested in following, add them to our Watch List tool and Trending Stocks will notify you when any one of your stocks is trending.
Then use our Trade Risk Calculator to determine the number of shares to buy to stay within your personal risk tolerance.
You don’t have to be a Trend Follower to take advantage of our risk management tools and sound investing information presented at the end of every business day.
After all, ultimately, isn’t your goal to: “Ride your winners and cut your Losses?
Don’t take our word for it. Prove to yourself that Trending Stocks and Managing Risk can have a positive effect on your investing, try our no obligation, no credit card, 4 Week FREE Trial.
Want to know more about why we created Trending Stocks? Here you go.