Today, we are playing portfolio manager. With the S&P 500 and Dow below their respective 50-day moving averages and threatening to move lower, you need to adjust your thinking towards the stock market.
This means you need to review your portfolio and holdings. Stocks that have recorded strong gains should be targets for some profit-taking. For instance, if you doubled your money on a stock, then by all means, take profits on half of the position and let the remaining half ride as free money. You may miss out on some gains, but with the downside risk, I would rather take some profits than hold on for a few extra dollars. This is the type of risk management you should be following in this stock market.
Also, don’t go and chase stocks on rallies at this point; this is a fool’s game. What you should be doing is taking the opportunity to sell some positions on market strength.
Have a stock that has been in the dumps? Look at rallies as an opportunity to sell. The stock market will always give you opportunities. You just need to recognize them.
I think the current hesitation and pullback to below key levels could be a signal to divest some positions. The last thing you want is to hold on and watch your profits disappear.
Just look at the advance so far this year. It cannot continue at the same pace. The stock market could close the year higher, but we will get through the gyrations in September and the fourth quarter. As I said in my previous commentary, imagine the U.S. striking Syria—this kind of move would generate chaos and uncertainty, not only in the Middle East, but globally.
The Federal Reserve is nearing the end of its printing of easy money, so be careful. Bond yields will fly higher, and interest rates will follow, which will impact the stock market.
Given all of this, you should also look to hedge your gains via the buying of put options on stocks and indices. The pros do it, and so should you. You will also sleep better at night.
And with the fourth quarter coming, it’s also time to examine and possibly re-balance your portfolio.
All of these strategies are simple and don’t require a lot of time, but ultimately, implementing these strategies will help save your sanity in the case of a stock market meltdown.
~ by George Leong, B.Comm.
This article was originally published at Investment Contrarians
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