Sometimes a bear Market can be a cake walk....or it can scare the sox off a soul.
Well, since that "bearish" alarm has been sounding, I thought I would write a few words about one method regular folks can use to protect their portfolio when the market trends downward.
1/ Reduce or eliminate the use of leverage. If you are a leveraged investor ....you use debt to accomplish your investing/trading goals. But in a down trending market, using leverage can expose you to risk that your portfolio may not be able to withstand. Therefore, it may be "prudent" for lack of a better word, to reduce the amount of leverage you use, so that if the downtrend continues for more than a few weeks, your leverage debt will not become unduly burdensome. Even a modest increase in interest rates can adversely affect a person's ability to service the debt held in leveraged accounts.
Be prepared......not afraid.....of changes in the markets.
If you want to be uber-frugal, then you may want to pay off all your margin loans completely so that you won't have that stress weighing on you. Are some of your positions hanging precariously by a thread? Selling off assets can be painful.... especially if you know you will get less than what you paid for them. But sometimes, for certain investors, selling off some positions is the only way to protecting their accounts from margin calls or utter "destruction". Take a close look at your accounts. Be fair, but don't hide your head in the sand. Risk is real. But risk can be well managed or ignored completely. Professional traders/investors never ignore risk...they simply learn to ride it's waves.
Now, to be fair, I am not going to say that everyone should reduce or eliminate their use of margin simply because there are some bearish signals in the markets. For some investors/traders, their skill set is well developed and somewhat professional. These kind of investors know how to hedge their trades to protect even large leveraged positions. If you have this skill....(you'll know if you do) then there is no reason to de-leverage. Playing it safe is for those who prefer not to handle the extra stress of debt exposure. Highly developed pro-traders know how to make and keep money flowing even in the worst of markets. But we must have the honesty to look at our trading/investing history and admit what kind of trader we are.
At the end of the day, it's about having a smidge of humility. Do you really know what you are doing? Do you have experience thriving through market corrections before? What if a correction turns into a full on recession? Wise folks will be able to withstand any scenario because they plan in advance. Are you pretending to be a better trader or investor than you know you are, just because you don't want to sell a certain position that is exposing you to inordinate risk? I am not asking these questions because i want to irritate you or get you to second guess yourself. No, I am asking these questions as your friend, because I want you to make it through to better days.
Are you using tools such as options without fully understanding what a down trend will do to your account? These are important questions to ask while the going is still ok. These are questions you need to answer before the rug gets pulled out from under the market. Maybe there will be no recession...maybe a steep correction will not arrive. We just don't know. But we can absolutely be prepared for any potential market condition. No body knows what markets may bring....great wealth or great tragedy. It can bring both depending on your depth of your skills, knowledge and how prepared you are to take advantage of market opportunities. A correction or even a gut wrenching recession can become a great great gift for those who know how to see and seize opportunity.
Well, that's all I wanted to talk about today...leverage and opportunity.
May God bless you will all that you need to move forward in your investing or trading journey.