Recent events indicate that the markets have entered a phase that is sure to challenge even the most battle-hardened investors. Simply picking good companies with compelling valuations isn’t going to cut it at this point. Instead, investors need to adopt a survivalist mentality and strategy geared toward making it through the rest of this year in one piece. At the same time, however, a focus on capital preservation doesn’t mean you should ignore the multitude of trading opportunities that can arise in a volatile market.
With this in mind, here are a few considerations that may help you survive this downturn and possibly even make some money along the way:
Avoid Companies With Warts, No Matter What the P/E
Distressed investments, turnaround stories and undervalued market leaders always seem to be compelling ideas on the surface — and I’ve been guilty of recommending my share of them in recent weeks. However, any stock with underlying challenges is going to face a tough road now that the market environment has turned sour.
Prime examples are shipping stocks, major banks and weaker retailers. These sectors are sure to present their share of dead-cat bounces in the months ahead, but the odds are better if you restrict your trading/investment list to stocks with only the strongest fundamentals. In short, if you’re leaning toward Best Buy (NYSE:BBY), think Amazon.com (NASDAQ:AMZN) instead. Now more than ever, the old adage “If you wouldn’t want to own it for a year, you shouldn’t own it for a day” is especially relevant.
Recognize a Trading Environment for What It Is
Long-term investing is a great concept on paper, but we’re now in a phase where rallies are likely to meet selling pressure in fairly short order. With the market likely to be weighed down indefinitely by this “crisis of governments,” now isn’t the time to be greedy. This means:
- Take profits quickly on any rallies.
- Be even more vigilant than usual about protecting yourself with stops.
- Keep your positions smaller than normal.
- Maintain cash on hand to capitalize on a final washout.
- Wait for evidence of stabilization before buying; there’s absolutely no need to try catching the falling knife here.