Stock Investing 101: 4 Moves To Make In A Declining Market

The volatility is back in the stock market as investors are buying and selling stocks with reckless abandon again. The Dow Jones had a few steep drops last week as fear is returning to the marketplace. There are growing fears of a double dip recession taking place and investors are afraid of holding stocks that may be plummeting. In order to restore calm back to the investing marketplace, here are a few things that you can do to protect yourself and your portfolio.

 

1. Start buying value stocks

One strategy that has always served me well during times of financial crisis is to buy the names that I know. You can buy stocks whose prices may have risen too rapidly during the periods of the most volatility. This could either be large cap blue chip stocks with massive cash flows or growth stocks whose valuations were far too excessive. Major market drops may be the only time that you will get to start buying shares of these companies.

2. Sell the safe havens

The best time to sell safe haven assets is during a fear rally. Gold, oil, and commodities tend to reach their highest levels when investors are abandoning the stock market. You could make some money for your self by selling these commodities once the market has gone through a pullback. A smart trader could have sold out of oil around the $108 to $110 level and buy back in later at a lower price.

3. Remember to diversify

Everyone knows to diversify their portfolio but lots of people forget when the stock market is booming. Money pours into equities at a phenomenal pace when the Dow Jones and S&P500 are rising. Some investors may even find themselves holding 85 to 90% of their portfolio’s assets in cash alone. This is a risky proposition for almost any investor. The returns of intermediate term bonds may not be as high as you like but they do offer positive returns. That is not anything to be looked down at when the market is tanking.

4.  Become a put buyer

If you are an investor in high beta stocks like Netflix and Amazon then you better buy yourself some puts protection. These stocks have a tendency to get hurt the most during market crashes because of their high P/E ratios. Buying a couple of put options can help to insulate your portfolio and will give you an out if your company’s stock price happens to come tumbling down.

Remember that stock investing does contain risk so you need to prepare yourself to handle the emotional ups and downs of the marketplace.

What moves do you make when the stock market is dropping? Do you add to your positions, sell your shares, or do nothing?

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9 Responses to “Stock Investing 101: 4 Moves To Make In A Declining Market”

  1. What do you think about dividend payers like ADP and JNJ?…I would think they are insulated from the volatility, and so far that seems to be the case, but who knows.

  2. avatar optionsdude says:

    Well, you know my opinion on this topic. I buy puts without question. I am holding puts with the 40 strike on Silver Wheaton so that even though it is trading at 34 today, I don’t have to worry. If it is still at 34 at the close next Friday, then I will be able to buy back into my original position at a discount and either increase my position of have some cash on the side.

    • avatar Mark says:

      I take it that you think that the selloff in silver was premature.

      • avatar optionsdude says:

        I can’t say that I think the sell-off in silver was premature. I think there was a lot of speculation and froth in the silver market and a sell-off was entirely justified. I will still be investing in SLW and managing my position with options.

  3. avatar Jordy says:

    I am just starting to learn about investing in the stock market. You’ve got my common sense intensely working here by the tone of your post, do you think we are headed for a “crash?”

  4. avatar Barata says:

    I like to use downturns as an opportunity to pick up shares at a discount.

  5. Just wanted to mention that in order to trade options on brokerage accounts you need to get special permission from the investment company to make sure you understand the risks.

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