January 15, 2008 at 3:30 pm by Tom Lydon
The S&P has not had a 10% correction in many months….until today.
Joe Bel Bruno for the Associated Press reports that persistent fears of a recession, weak retail sales figures and disappointing results from Citigroup sent the markets plunging.
What’s an investor to do? Where most well-known market index ETFs such as the Dow, S&P and Nasdaq have dropped more than 10% off of their recent highs, some international and sector-specific ETFs have corrected more than 20%.
This could be a normal correction and the market could catch up to where it left off a few months ago. But what if it doesn’t? What if the doom and gloom pasted all over CNBC is correct? Here are three rules that we continue to remind investors about that should keep most of us out of trouble:
- Maintain an 8% stop-loss on your ETFs.
- Keep an eye on the trend. If your ETF declines below its 50-day average, that’s not a good sign. If the same ETF declines below its 200-day average, sell.
- Don’t chase markets that are too hot. The last time many world markets and industry groups collectively hit news highs was in 2000. You know what happened then. Keep your emotions in check.
Tags | Financial, GUR, NASDAQ, Retail & Consumer, S&P 500, UNG
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January 20th, 2008 at 4:49 am
Question; If you have missed the 8% drop by not paying attention and the drop iw more like 20%; Then what?
January 21st, 2008 at 10:14 am
Great question David; you’re not alone. Although you may not be happy about the recent decline in your portfolio, you’re probably thinking “If I sell now, the market will surely rebound just when I get out.”
Since this does not have to be an “all or nothing” strategy, you might consider the following:
-Sell 1/3 of your equity holdings and focus on the most aggressive positions. They were probably some of the best performers in 2007 but have given back the most in the recent decline. Although they have declined 20-30%, they are currently 10-15% below their 200-day moving averages.
-If they decline by another 5-7% consider selling another 1/3.
-Keep an eye on the 200-day average of these positions. As the trend lines continue to decline, there will be an excellent buying opportunity in the future when markets eventually rebound.
-This may sound simple but it would help you to provide some downside protection and a little emotional stability while following a plan.
Best of luck!
-Tom
October 6th, 2008 at 12:07 pm
Now here’s a question: some of my positions have declined 40% almost over night. Should I sell (my portfolio is at around 25% loss) or continue to strengthen these positions over the long run, waiting for the upside?
Also, is the decline in price really the only gauge we have on ETFs?
Your assistance is greatly appreciated.
October 6th, 2008 at 2:41 pm
Hi Steve,
Our strategy is to sell 8% off the high or below the 200-day moving average. If you did this now, you could be selling at the bottom, so in this case, we suggest selling a third for each 8% decline until you’re completely out (if that time comes…the market could recover, too. You never know.).