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Archive for August, 2011

The 13 Worst Days in Postwar Market History

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What Should I Do Now?

The first thing every investor should do when the stock market goes nuts like it is now, is to take a breath, step back, and don’t panic.  It’s almost always a mistake to join the selling frenzy and sell your stocks during one of these panic episodes.  Keep in mind that if you sell your stocks now, you have to ask yourself – to whom?  There has to be a buyer for your stock, and right now buyers are few and far between.  That means that the few courageous souls who are willing to take your stocks off your hands are in the drivers seat when it comes to price.  They’re not going to pay you a fair and reasonable price, they’re going to demand a big discount from you.  In all likelihood, you’ll probably be selling at prices that are closer to the bottom than the middle of the trading range.

One of the things we insist our coaching clients do is to put in place a contingency plan for situations like this.  Our clients know ahead of time what they’re going to do as the market reaches certain price levels.  If a client has a 10% threshold of pain, they have already sold their stocks.  We’re down 12% from the peak already.  If their threshold is 15%, then they’re still holding on to their stocks.  They may be nervous and stressed, but they’re not in a panic.

Some of our clients use a moving average system to generate trading signals.  One of our most popular is the one month/ten month simple moving average crossover.  This system gave a sell signal last week, and our clients who use it are out of the market.  They didn’t sell because they were panicked, they sold because their system told them to sell.

The thing that’s so difficult about selling your stocks in a market like this is that you have to make two decisions, and you have to be right about both of them.  You have to be right about selling, which means it has to turn out that the market continues to decline after you bail out.  But even more importantly, you have to also be right about when to get back into stocks.  This decision is even more difficult than the selling decision.  How will you know when it’s safe to get back into the market?  Studies have shown that the average investor does a very poor job of making this decision.

But our coaching clients know ahead of time what they’re going to do about getting back in.  Using our moving average system as an example, our clients know that when the one month simple moving average crosses above the ten month  line, it’s time for them to get back into stocks.  They don’t have to worry about missing the turn, because they have a plan in place.

Do you have a plan in place?  Visit our website at zeninvestor.org for details on how to write your plan.