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The Market is Down, Inflation is Up, Recession Might be Here and my Stocks are in the Tank. What Should I do?

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“ Remember that history always repeats itself. Every great bubble in history has broken. There are no exceptions.”
Jeremy Grantham

The short answer is, you do have several options. They include:

  • Stay in and ride the Market down;
  • Add stop loss orders to your stocks and ETFs;
  • Sell the losers now and invest in stocks that are still trending;
  • Sell now and wait for the market bottom with lots of cash.

This post will explain each of alternatives and help you decide which might be best for you.

At the beginning of the Pandemic, from the mid February to end of March, 2020 the S&P 500 lost just under 1,000 points.

From the end of March, 2020 to end of December, 2021, in twenty-one months, the market went from $2439 to a staggering $4758.

Had the Market maintained its February, 2020 level of $3339, the end of December, 2021 level would still be very impressive.

That was December 2021 — the S&P up, the DOW up, the NASDAQ up.

The market, that is the S&P, is now down just over 18% from December, 2021 high of $4758 to current $3893, a loss of $865.

I recently ran into a friend of mine and we started catching up. The conversation eventually moved to the state of the Market.

His portfolio was already down about 30+%, and heading lower. He was very concerned about where the market was headed.

While I was sympathetic to his concerns, I didn’t have much to offer regarding the direction of the market.

Most analysts think, in spite of some modest up/down days, it can go a lot lower and probably will. Let’s hope they are mistaken.

When the market was going up almost any stock was a good selection, but in the midst of a “Systemic” downturn, almost any selection can be a bad one.

However, holding on to your current positions is not necessarily a good move either. It’s a real dilemma.

He finally asked me what would I suggest.

I was a little surprised, because he knows that I am now a Trend Follower and he is a traditional Buy & Hold investor.

I think I surprised him when I said that I didn’t have a crystal ball and if he was worried about his current portfolio, or what was left of it, and the direction of the Market, I’d consider moving to cash.

He replied, “Move to cash? How is that going to help me?”

I told him, “For starters it will reduce some of your stress and at least your portfolio will stop bleeding.”

Going to cash has the same effect as my stocks stopping out. Which is exactly what recently happened. The good news, for me, is that the stops resulted in giving back some of my gains, versus the deep loses many have already suffered.

Some people are uncomfortable with the idea of stopping out. However, leaving yourself open to even bigger losses is not a good alternative either.

If you do go to cash. The next few steps you take will be really important.

Time for a Reset?

Going to cash gives you the opportunity to do a reset.

With the market in a free fall, it is not necessary that you jump in immediately. You have time to wait and determine if, in fact, the market has really bottomed out and is in the process of a long sustainable recovery. Patience.

Yes, you may not get back in at the very bottom, but you may also avoid getting in well before it hits bottom and sustain another series of losses.

We are in a “Systemic” downturn. Systemic means that the impact is broad, and therefore difficult to avoid. It can affect the entire Market not just an individual Sector or Industry.

When you get the flu, your entire body is affected. When you have a tooth ache, even though painful, it affects only one area not the whole body. The flu is “Systemic”.

In a case like a Super Bubble bursting and the resulting “Systemic” Market downturn, the investor following a Trend Following Strategy is likely to sell and move to cash sooner than later.

The Market may bounce up and down, maybe even dramatically, as in the Dot.com bubble from 2000, to its eventually bottom in 2004 but the direction was decidedly down. That was the ‘trend’.

Let’s Look At Those Choices

In the case of a Systemic Downturn, what are your options?

  1. You can stay invested and ride the Market down as far as it goes.
  2. You can add stop loss orders to the stocks in your portfolio now and continue to wait for the turnaround.
  3. You can sell now and invest in any stocks that may be trending counter to the Market.
  4. You can sell now and wait until it is clear the bottom has been reached and get back in the Market with lots of cash for those great buys.

The problem with #1 is that you have lowered the value of your portfolio dramatically. If your portfolio lost 50% of its value, and that is very possible, it must go up 100% just to get to even.

And you may have very little cash to scoop up those great bargains.

Number two is tricky. The value of my friend’s portfolio is down 30+%. In developing a good stop loss position, depending on the individual stock or ETF’s volatility, he may be looking at a 15% stop loss which if it hits will mean he is down 45+%.

At this point I would be inclined to say he has missed his opportunity.

However, it is very important to consider the individual stocks in that portfolio. He may have a few that are not down by a large number and those could be great candidates for adding a trailing stop loss.

Let’s look at number 3. There can be stocks that are running counter to the Market for various reasons and are worth a look.

Currently, energy stocks would be an example due to special circumstances in that business. Investors have seen quite an uptick in Energy stock prices in spite of the Market’s losses in the last 6 months.

And number 4, sell, wait and watch for the Market turnaround with, hopefully, a pile of cash to buy great trending stocks and ETFs at a fraction of the price you originally bought them for.

This requires patience but you are using the time to plan your strategy and assess which industries and stocks within them are your best opportunities.

Reassessing Your Situation

Investing is an incredibly valuable life skill. Now is the time to further develop it.

Replace the hand-wringing with some thoughtful planning. Doing so will help reduce stress.

Consider lessons learned and actively learn more about the Markets and the Sectors that comprise them. In other words, really use this time for deeper learning. You will feel much more confident and in control. Recognize the difference between investing and Gambling!

Personal Risk Tolerance – Of the amount you are planning to invest, given the current environment, how much are you willing to risk? If you have $10,000 to invest how much can you live with losing? 10%? 15%? 20%?

Would those % change if you have more to invest? If yes, ask yourself why! You are getting to know the reasons for your risk tolerance. A good thing to know!

Position Sizing – Considering the $10,000 you have to invest, how many stocks are you interested in buying and adding to your portfolio? Let’s say 5 stocks.

You are willing to invest $10,000 in 5 stocks and risk 10% or $1000.

This means, in general, you would consider risking $200 on each of the 5 stocks purchased.

Realize you are deciding – in advance – how much you are willing to risk. No emotion. You are not agonizing later whether you should sell a losing stock.

You can use your trailing stop loss to help you manage the risk and the emotion.

We aren’t finished yet. An important part of managing risk and developing your investing skills is determining how many shares of a stock to buy.

We are not whistling in the wind here. We have a carefully defined process to help us make this decision.

Let’s say you have identified a trending stock that looks very good to you. It is selling at $25/share and, based on its recent volatility, a reasonable stop loss amount is $2.50, in this case 10%.

This is a simple example. For this transaction to stay within your personal risk tolerance, you could consider buying 80 shares at $25 for a purchase price of $2,000.

Let’s try another example using our Trade Risk Calculator©. This makes it really easy for an investor to know the number of shares to consider to stay within their risk tolerance.

Some people don’t like doing the math so we do it for them!

In this example considering CORT, you will see the Portfolio Amount of $10,000; the Portfolio Risk of $1,000 (10%); Risk per Trade of $200; the Stock Symbol; Closing Price; Stop Loss Amount in $ or % (found on Report page for that stock); the # of Shares Calculated and Cost of Shares.

If the investor decides to buy more than 43 shares, they have the cash to do so but they are exceeding their risk tolerance.

Additional Ideas To Consider

If, as a Buy & Hold investor you typically buy ETFs, one strategy is to watch for your favorite ETFs to begin to turn.

Then, instead of simply investing in the ETF, look at the stocks that make up the ETF and invest in the individual best performing stocks.

In most cases a handful of stocks will be pulling the rest along. At a later date you can buy the ETF.

Here’s another option if you typically buy the index, that is the S&P 500. Of the 500 stocks, a limited number will lead the Index back.

Here again, you can capitalize on the big gainers until the index comes back to the point where you have confidence it will continue to move in a generally upward trend.

Finally, both of the prior suggestions are based on using a Stop Loss transaction with each purchase to prevent another significant loss and potentially lock in gains.

Use the Trending Stocks Dashboard to identify trending stocks and the Results report will provide a calculated stop loss for you to consider for every stock.

In addition, the Trade Risk Calculator© works for both Trend Followers and non-trend followers.

Both of these features, the Trailing Stop Loss and the Trade Risk Calculator© among others, will help you manage your Risk.

If you do that, you will put yourself in position to “Ride Your Winners and Cut Your Losses”!

Our goal is to help all investors grow wealth and manage risk to keep it!

Have questions? Reply to this email or send a question to support@trendingstocks.io . We love answering questions!

Trending Stocks is an information platform only. Information provided on both the website, through the reports, The Trend and Trend Tidbits is meant to help users with their own analysis and strategies. Users are solely responsible for their investment decisions.

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