In view of last week’s market decline, reader Govind pointed to an article reviewing some of the historical market corrections.
Ranging from the precious metals crash in 1980, the emerging markets debt crisis in 1998 to the dot-com bust and currently the subprime mortgage and housing debacle, the underlying theme seems to be the same: Crashes and bear markets are part of history and will be with us in the future. This is not a prediction on my part; it’s pretty much a built-in economic mechanism which rears its ugly head every so often. As the article correctly stated “Rotating bubbles are the nature of capitalism.”
In other words, you need to come to grips with the fact that these events occur randomly and those who aim to predict are more likely to be wrong than right as I posted about on Saturday.
Since these bubbles, or the deflation of them, can’t be anticipated, having an alternative plan to deal with them is paramount. The only way I have found over the past 25 years is use a combination of trend tracking and trailing stop losses to protect your capital during times of uncertainty. While this approach is not designed to avoid any 3% hiccup in the market, it will keep you away from the devastating blows that have pushed portfolios to 50% and 60% losses.
If you heard me say this before, you are right; it’s the most crucial part of an investment strategy and far more important than being exposed to the latest and greatest fund or ETF.
The events of last week have shown again that we are playing global game and that there are no safe havens. In view of that fact, you can do the next best thing: Give your portfolio a little room to move within a certain range; if that range is violated on the downside, get out!