Stock Market Investors – Seven Tips for a Great Summer Away From Your Investments
#5: Practice limit orders.
The COVID-19 crisis is far from over. The risk of a new wave related to the Delta variant maintains the epidemic threat on the world. Thus, the Fed's monetary policy intentions for the coming months are under constant scrutiny by all investors.
Generally, summer is a time of relaxation in the financial markets, which can produce surprises with unexpected drops in some stocks.
As is the case with the health rules to protect you from COVID-19, this is clearly not the time to let your guard down. In what follows, I offer 7 tips to help you have a good summer away from your investments in the stock market.
Take partial capital gains
Since the spectacular rebound in March 2020, the stock market has continued a very nice run. The Dow Jones and the S&P 500 are still at record levels.
In the stock market, you have to remember that you only make or lose money when you sell.
If you've been one of the big winners in the stock market over the past few months, it may be a good idea to take profits before you leave for vacation to enjoy a quiet summer. This will help you avoid the inevitable reversals.
Beyond 20% gain, you can lighten a position by taking a partial profit. This will allow you to make money already without depriving you of a possible continuation of the rise on the rest of the line.
Increase your liquidity
When the financial markets become nervous again, it is generally advisable to increase your liquid assets, even if they do not earn you any immediate return. The return of inflation will penalize you slightly, but your reserves will not be exposed to possible market shocks.
This will allow you to reinvest after a possible downturn. You can take advantage of this when you return from vacation. A win-win situation for you: calm during your vacation, and new opportunities to seize when you return to the stock market.
Stay informed during your vacation
In the stock market, the following golden rule is often repeated:
Time in the market always beat timing the market.
Those with a long-term view outweigh those with a short-term view 99% of the time. In fact, you might think that you can cut yourself off from stock market information while on vacation.
It would be a mistake to think that way.
Even during your vacation, the Fed will continue to work and make announcements. So you need to make an effort to stay informed at least a little bit to be prepared for possible investor overreactions to the Fed's monetary policy announcements.
Optimize entry points
Knowing how to sell is not enough to make a profit in the stock market. You also need to know how to buy at the right time, i.e. when prices have fallen, in the hope of a later rebound.
After 2008, the strong rise of the world stock markets in the decade 2009-2019 was however hit by many shocks, such as those of summer 2011, January 2016, and the last quarter of 2018, with declines of 20 to 30%.
Those who were able to take advantage of these downturns to enter certain stocks made big profits. So you should look to optimize your entry points. If you do this, you will be able to be more zen when it comes time to go on vacation away from your investments.
Practice limit orders
When buying or selling, you should take advantage of limit orders. These orders have a ceiling price for buying and a floor price for selling. An excess of decline (or rise) on promising stocks can thus be used this summer to buy (or sell) at a good price.
If you want to complete (or skim) a line, slip in orders at 10% below the last prices.
These orders must be given with revocation, i.e. until the end of the week, month, or year that you have set. In this way, you will have more time to take advantage of a downturn or a feverish stock market.
All while enjoying your vacation.
Protect your portfolio
When you return from vacation, there is nothing worse than regretting the fall of stocks you were holding. To avoid this, you can use stop-loss orders. They can protect you from a sudden reversal of the trend.
Let's take the example of a stock that is priced at $100.
You can place a sell order at the $90 stop. If the threshold is not breached, you continue to profit from the trend. If the stock breaks the $90 mark on the downside, your order will turn into a sell order at any price, with no limit.
If the fall continues and provided that the order is executed around $90, you will have secured part of your capital gains.
Diversify your investments for greater peace of mind
To spread the risks within your equity portfolio, you need to diversify your stock investments among a sufficient number of stocks, and different sectors or countries.
Beyond the stock market, you should also diversify your wealth with other non-financial assets: real estate, gold, Bitcoin, ...
All these assets do not react in the same way to crises. Some can act as safe havens from time to time. You will then have greater serenity by going on vacation and leaving the stock market out of your concerns temporarily.
Final Thoughts
Profiting from the stock market requires different qualities from investors. You need to be able to take a long-term view while being ready to react in the short term to opportunities that may arise when the Fed announces major changes in monetary policy.
In fact, it's never easy to go on vacation and leave your portfolio in the stock market.
However, this is something you must learn to do to recharge your batteries. By applying the 7 tips I just shared with you, you will be able to go on vacation more serenely by leaving your investments aside.
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