Maybe it’s the time of year. The stock market is taking investors on a terrifying haunted house ride, while gloom and doom predominate. Listen carefully and you can almost hear witches cackling and werewolves howling in the background. The question is what to do when things don’t make much sense. Avoiding panic is the first step.
The efficient market theorists claim that stock-picking is a waste of time. Everything that can possibly be known about a stock is reflected in its price within minutes. Investors act rationally, based on the information available. Really? Look at some of the price swings in a single day. Did the underlying value of the companies really change that much in less than 24 hours? Clearly, betting on the rationality of human beings is not always a 0-eat plan.
Here are better strategies for coping with a haunted market:
1) Avoid dumping everything, unless you want out for good. Perhaps you’ve discovered that you’re the kind of person who just can’t tolerate the ups and downs. If so, it’s better to have peace of mind and find less volatile ways to deploy your money. Even then, it’s probably better to sell over a period of months than to sell everything just when you’re feeling most frightened.
2) Staying put and waiting for calmer times is often a better strategy than selling. In times like these, people will tell you to sell all your small caps and higher-risk stocks and put all the money in large, safe dividend-payers. Try to do that once the volatility is underway and you’ll probably get terrible prices for your small companies and pay relatively large premiums for the safer companies. Unless you believe your small companies can’t survive a recession (in which case one has to wonder why you bought them in the first place) you may be better off doing nothing. There a lot of studies that show that buy and hold investors do surprisingly well. While you’re holding, you continue to coiled your dividends. This is a great time to start researching some tempting places to put that money.
3) Looking for bargains as the market falls is the best strategy of all. It isn’t easy and it takes nerve. Who knows where the bottom is? But as the market drops, the case for buying gets clearer. Stocks selling below the value of their assets and stocks selling for only a few times the most conservative estimates of their growth rates are tempting—just make sure you also see solid balance sheets.
4) Resist the urge to sell your winners and hang on to the losers. When you’re losing money on a number of stocks, it’s tempting to realize gains on your winners just to make yourself feel better. This is usually a mistake. Winners are often your strongest stocks. If you want to lighten up on stocks sell losers and winners in balance so you can minimize your tax bill.
