This week’s sharp downside market activity has left a lot of investors somewhat breathless and wondering if a repeat of last year’s Many/June debacle could be on the agenda again. Or, could it be just a one week correction that can be overcome within a 6-week period just like at the end of February 07?
While no one has that answer, there are a few things you can do to handle any market correction without the usual emotional impact. Rather than seeking psychological treatment, or finding the nearest “mixologist,” as shown in the picture, here are some that I have found helpful:
1. Reduce your news intake sharply. There is no need to listen to the talking heads on CNBC and other financial channels. Their hyped up views will do nothing to calm your nerves; besides, they don’t know any more than you do as to what the market will do next.
2. Make sure that you know where your sell stops are supposed to be and enter your orders “after” the points have been clearly penetrated. Remember, even if you use ETFs, for sell stop purposes I recommend you only work the with day-end closing prices.
3. View your portfolio with the right mindset. Say, the current value of your holdings is $100k. That is not really correct, isn’t it? Unless, of course, you had liquidated all of your holdings at that very day.
A more realistic view of the view of the value of your portfolio would be to deduct your allotted sell stop percentage. For example, if you use my recommended trailing sell stop of 7%, then your $100k portfolio would be worth, in the worst case, only $93k.
You may not like looking at it that way, but it is realistic when the market stalls or retreats. It will help you to always focus on the “real” value instead of on a number that is not only subject to change daily but also totally out of your control.
If you can incorporate these 3 things into your day-to-day investing life, you will be able to keep your emotions at bay which, knowing that you have a plan to deal with uncertainties, will allow you to sleep better at night.
And if that doesn’t work, go ahead and visit the nearest “mixologist.”
