Much of the recent panic selling in the stock market comes from several factors including Standard and Poor’s downgrade of U.S. Debt from triple A to double A plus, slow moving economy, high unemployment rate, financial woes in Europe and of course our dysfunctional government.
It is no wonder the markets are in a volatile state with wild market swings changing from moment to moment. It’s enough to scare any investor and cause anxiety and missteps in making poor investment choices.
It is strongly recommended that an investor create a stop loss strategy which monitors stock price movement and issues price alerts when a stock, mutual fund or exchange traded fund meets a preset price alert.
There are many investment software programs that track and monitor investments along with price alerts. You can also create your own using Microsoft Excel or if you prefer a free alternative try OpenOffice spreadsheet program.
I produce a report that monitors specific securities and flags potential problems, as well as when a stock or mutual fund reaches a preset high alert. There are three levels that trigger an alert.
- 10 % alert if price is below cost basis.
- Sell alert if the security falls below a preset percentage.
- High alert if the price movement advances upward.
If a high alert is triggered, then I move the other two alerts upward to protect my gains and reset the high alert as well.
In case of a total market melt down where the overall market moves dramatically downward even if securities reach sell price alerts. I may not sell if the stock in question has a strong balance sheet and or pays a dividend above 3 % and that dividend is safe.
True these quality stocks may drop significantly as they did in the fall of 2008 reaching a decline of 45% or more, but they rebounded nicely once the market began to turn around.
I would recommend you sell if any specific stock falls to a sell target price if said company is speculative, doesn’t have a strong balance sheet or high dividends to support itself during a market down turn.
In a down market if I own strong companies, especially those with a long history of paying dividends, I prefer to hold and collect the dividends versus selling the stock and allowing the proceeds to sit in a very low money market account. Trying to time the market and re-enter is extremely difficult and in most cases, investors miss the bulk of appreciation once the market turns around.
The most important lesson is not to panic during volatile market swings and keep a cool head.