Have you noticed that the internet is full of articles that have a lot to say but they don’t get down to the nitty-gritty?
Many of those well-meaning articles don’t understand that what you’re looking for is truly actionable steps.
What should you do when you believe that the market is in bad shape and what should you do when the market is in good shape?
It would be difficult to provide all of that information without literally writing a book, but I’ll try to cover the basics in this post.
First, you have to establish a time horizon. Investors hold onto their investments for long periods of time. I’m talking years, decades, generations, not days, weeks, or months.
And then there are traders. They may hold onto their investments for seconds, minutes, days, or months.
Of course, these are very loose time frames, but you must know which type of stock investor/trader you want to be to follow the set of rules below.
In a Good Market
If you’re an investor, you do next to nothing. You let those stocks go up and make you money. You know that at some point the market will reverse, but that’s OK because you’re collecting dividends on some of your stocks.
Regardless of what the market does to your stock price, you’re still making money.
Traders also let their investment run up in value, but they know that even in bull markets there will be corrections.
For that reason, traders have their stops set, and if they’re aggressive, they might have some limit orders in place for short positions.
As the market appears to be nearing its peak, traders might even sell some covered calls or sell some puts if they are able.
Some of these techniques are a little more advanced, but if you’re a trader, these should be part of your basic tool kit.
The most important thing for investors is to let their investment make money. For traders, prepare for the market move down and don’t try to time the exact top.
You can’t, and you’ll lose money. Greedy investors make wrong decisions. You may beat the market, but you’ll rarely beat it by much. Don’t try and you’ll make money.
In a Bad Market
For investors, a bad market is an opportunity to buy. Those jittery traders always think financial implosion is one market day away. Investors capitalize on that.
As markets go down, stock prices go down with them, which makes dividend stocks even more attractive because the yield goes up.
If the market ends up low enough, investors could buy stocks with a 6% dividend yield that used to barely yield 4%. These are sometimes referred to as “accidental” high-yielders.
Good investors know that if they wait long enough they’ll get a great price, so they wait. Because they are planning to hold these stocks for years they would rather be patient and wait for the price they want.
Traders would never find themselves in all long positions, because they know that it is easier to lose money than it is to make it.
As the market goes down, a trader’s short positions are paying off and the long positions were sold for a small loss or a little less gain.
Traders also look for value stocks, but they know that what goes down will eventually go up so they’re prepared.
They know that the best of breed stocks will probably turn around before the overall market so they watch those market leaders and get their money ready.
Just like they did when things were good, the best traders know that they can’t catch the perfect bottom of the market and they don’t try.
They wait for the market to recover a little bit and jump back in. Stops are always tight because a trader would rather take a small loss early than a big loss waiting for things to turn around.
This is just an overview, but remember that investors don’t overtrade and traders don’t try to be heroes. They let their winners run and get out of their losers fast.