The stock market has been on a wild ride since October as the nearly two-year streak of new records has come to screeching halt. In its place, we have been treated to a healthy (or is it unhealthy?) dose of volatility.
For some, this has meant that their 401k accounts have given back many of the gains of the past year; while for others the new reality has meant an opportunity to make some. It’s an easy guess where you want to be – on the plus side of the ledger. As such, here are some tried and tested tips on how to cash in on the stock market rout.
It Doesn’t Take Genius to Make Money
In fact, being too smart probably gets in the way. This is the case when the markets are in an uproar. It doesn’t matter if you make your decisions based on technical or fundamental analysis, calling the bottom is an impossible task; as such, you shouldn’t even try.
Instead, now is a time to catch your breath, possibly perform some tax harvesting to lower your tax bill, and then figure out how to get back in the game. Oddly enough, this sell-off couldn’t have come at a better time for some as there is a chance to use the losses of the last quarter to reduce their tax liabilities. This is especially true for business owners and it is something they should discuss with their small business tax preparation specialist.
See, you don’t need to be a genius; you just need to know how to react to what is coming your way. From there, don’t try to get ahead of yourself. Yes, the market might be losing its mind, but that doesn’t mean you should and if you want to make money, then here are a few tips.
- Buy Shares in Profitable Businesses
It’s not rocket science as you are acquiring an equity stake in the company and not a stake in its debt. As such, you want to make sure the companies you invest are not only profitable today but are also projected to be profitable tomorrow.
Sure, you might pay a slight premium for these companies, but the key is to find the diamond in the rough. This might be a company with limited analyst coverage but is not really on the street or it might be a company in an industry you know very well as this will allow you to put your experience to work.
Just remember that you need to do your homework before placing a buy order and that no investment is without risk. This brings us to the second tip.
- Set Limits and Stick to Them
The worst thing you can do is to become married to a stock. Instead, recognize that sometimes you will get an investment decision wrong and as such you will need to liquidate a position. The trick is to do it in an orderly fashion.
Another thing to know is that the second your broker or financial adviser starts to talk about “dollar cost averaging” it’s time to hang up the phone. Sure, dollar cost averaging usually works if you planning to hold a position for five or 10 years, it is not for everyone. In fact, using the strategy very much depends on what you need your investments to deliver for you.
There are times when it is better to get out of a position rather than getting deeper into a quagmire. Also keep in mind that just because you can “buy the dip” there are times when it makes even more sense to buy slightly off the bottom – just as long as you don’t follow the example of all the highfalutin corporate boards over the past you who approved share buybacks at record prices only to see their market caps fall in the past quarter.
- Keep Your Costs Low
If your portfolio is made up of profitable companies, then it is likely that they are paying dividends. Think of this as free money and assuming the shares haven’t fallen below your stop loss line, you can use these funds to buy even more shares.
But that is not all, you also want to look at your rates of return. Granted, they might be a bit harder to come by in a choppy market but if you can maximize your yields, then you will be able to create even more free cash, which can be invested in tax-free municipal bonds or some other vehicle.
Just because the stock market is in freefall doesn’t mean that you need to kiss away your money. Remember that it doesn’t take a genius to take money, just keep your head, invest in profitable businesses, set limits and stick to them, and keep your costs low.
Disclaimer: This content does not necessarily represent the views of IWB.