How To Invest in an Unpredictable Stock Market
By Paul Mladjenovic
With the Dow recently surging past 17,000, many observers are concerned about it becoming a bubble. When you read the financial news, it seems like the only “bubble” popping sound is the cork off the champagne bottle on Wall Street as many bullish commentators cheer on the record-setting stock market.
However, there is also concern and caution in the air. There are plenty of things happening lately that paint an ugly picture. The U.S. Gross Domestic Product (GDP) from the first quarter of 2014 was negative and the general economy still looks problematic and sluggish. Meanwhile, the international scene is loaded with negative activity ranging from the ongoing crisis with Russia and Ukraine along with violence and war in the Middle East.
It is a schizophrenic scene; conflict and negativity across the globe and difficulty across our economy yet the stock market seems to keep shrugging off any potential worries and keeps powering up. What should investors do? After all, as any “prepper” would tell you, you get ready before the trouble starts. You never attempt to buy fire insurance when the house is already burning down. Is the market poised for a correction…or worse? Or will it keep zig-zagging upward regardless of the world’s travails?
I could give you an answer about what you should do but, to me, the missing ingredient is who you (the reader) are and what your goals and personal profile are all about. First, before I give you some ideas about what you should consider, let me express my concern about “the big picture” as I see it today.
I want to state for the record that real-time (the summer of 2014), I am very concerned that we have crossed into bubble territory. I started being concerned some months ago but my research keeps confirming to me that caution is (or should be) the guide today. The real economy is indeed weak and many investors are complacent. The drivers of the stock market gains are not investors getting excited about the economy’s outlook…it is liquidity from the Federal Reserve (and their member money center banks). I believe that a correction is a strong possibility and a major bear market is not out of the question.
In a different venue (such as at my YouTube channel or blog), I will get into greater details about why today’s market warrants major concern (and what to do about it), but in this article, I want to address some points that stock investors should consider, and definitely discuss, with their financial advisors.
You can’t get into voluminous details about all the strategies and tactics an investor should do in today’s dicey markets in a single article, but I can provide some basic guidelines that most investors should mull over.
First of all, you should analyze yourself and your situation before you look at your stock portfolio. If you are, for example, in your thirties and you have a long time horizon (7-8 years or longer) then don’t sweat the occasional pull back. If the stocks in your portfolio are of solid, profitable companies that are selling products and/or services that consumers are buying today and will continue for the foreseeable future, then don’t be overly concerned about a temporary pullback. Quality companies that had their stocks plunge during the 2008-09 crisis recovered and are now higher than ever.
If, for example, your situation is that you are in your mid-sixties and very close to retirement, then consider defensive strategies such as utilizing stop loss orders and switching from growth stocks to those public companies that are stable, established in their market and also pay dividends.
Here are some further points/ questions that you should consider:
- Which stocks have gone up the most in your portfolio? If they are growth stocks and their fundamentals are shaky (shrinking profits, high debts, faltering sales, etc.) then consider selling them or using stop loss orders.
- Are you adequately diversified among industries? Consider stocks of companies that are in those industries that will keep chugging along regardless of domestic and international skirmishes such as water, energy, food, etc.
- Are you adequately diversified away from stocks? Do you have cash in the bank, physical precious metals, US savings bonds, etc.? When the stock market seems to be doing very well, it is the opportune time to take some profits and deploy the money elsewhere.
- Are you using hedging strategies? Many investors use vehicles that can help their overall stock portfolio perform at a safer level such as using option strategies such as protective puts and covered calls.
Although I barely scratched the surface of all the factors that should be carefully considered when planning your investment strategy, take these main points to heart and your stock investing pursuits will be safer and continue to be profitable in due course. And if and when the stock market does correct or plunge sharply, you will sleep easier…and look smarter at that next BBQ get-together!
Paul Mladjenovic is a Certified Financial Planner, micro-entrepreneur, and national speaker and educator on investing and financial matters. He is the author of Stock Investing For Dummies, Micro-Entrepreneurship For Dummies, and Precious Metals Investing For Dummies. Paul can be found online on his website at www.RavingCapitalist.com and via Twitter @PaulMlad.