How to Shield from Days Like Monday
Monday was the sixth worst day for the Dow in history... sort of. Based on how much was lost -- as a percentage -- it wasn't so bad. But that doesn't mean you shouldn't protect yourself from future days like it. Fortunately, there are some steps you can take... tools for your investment toolbox... and one weapon for your trading sheath.
On Monday, the market collapsed on news of Chinese retaliation for President Trump’s latest round of tariffs on $300 billion of its goods.
By late afternoon, the Dow was nearing the deadly psychologically damaging threshold of a 1,000-point drop. It recovered to end the day down 767 points.
Now, seeing the market fall so far, so quickly can be painful… especially if you have money in stocks. But we all need to keep in mind what this kind of freefall actually means.
Monday’s decline marked the sixth largest daily point loss in the Dow in history. Sounds bad, right? But consider this, the top four largest drops came last year… and we didn’t see the end of gains then, did we?
Point drops are far different than percentage declines. For instance, just a decade ago, the market fell 7% in a single day. But that was actually less than any of last year’s big drops.
It still doesn’t feel great as stock investors. But there’s another side to this, as I’ll get to in a moment.
If the mere threat of wipeout days like this still make you nervous to invest, there are some tools you can use to protect yourself.
Today, I’d like to cover two… and then offer a way to actually benefit from market falls.
If you are a seasoned investor, you likely already know all about these and even use them in your own portfolio. But it never hurts to bring them up again.
A stop loss is a line in the sand you put on a position right at the start of an investment. For instance, you can create a 25% stop loss – sometimes even through your broker – that triggers if shares fall by a quarter of their value.
This is essentially saying that you won’t sit on a position if it falls by that much. That potential 25% loss is your line in the sand. You won’t cross it.
On days like Monday – or worse ones like 2008 – you might see a few of your positions trigger such a loss. But if you stick to your guns and act based on your wits rather than your whims, you would sell that position and be done with it.
Taking a 25% loss is never fun or easy. But it is far better than a 50% or worse loss. I think we can all agree to that.
Stop losses are meant to just be a psychological protection. Knowing that you won’t take a loss of more than 25%, while putting no restrictions on your gains puts you at a significant advantage.
That bring me to the second shield one can use in a market like this…
The market’s hitting record highs All The Time! Massive deregulation, across the board tax cuts, a repatriation of trillions of USD & reshuffling of the trade deck have created an American Boom. But it’s HOW you play this market that can turn $250 into $100k or more!
Similar to stop losses, a trailing stop is a protective line in the sand for your positions. However, this one can move.
For any position you have that’s up in a significant way, even just 20% or 30%, you want to make sure you keep those gains. But you also want to “buy low and sell high”. So, you let it run.
But almost worse than being wrong about a play from the start is being right about it, then watching all of those gains wash away in a selloff like Monday.
So, you can use trailing stops. You would put these on portfolio positions that have already moved higher from your buy price. These are often much narrower than a stop loss. Instead of 25%, you could set a 10% or 15% trailing stop on a position.
The way it works is you take the most recent high price (usually using daily closing prices) and knock 15% off it. So, for a $10 stock that you bought at $5, you’d set a trailing stop at $8.50. That represents a 15% fall from its peak price. It doesn’t give you that nice triple-digit gain by selling at $10. But it does protect 70% of your winnings ($3.50 on your $5 investment).
These kinds of tools protect when the market instills fear. They let investors sleep well at night. And they offer was great way to keep your emotions off the table after you’ve bought a stock.
There is one other tool, you can use in falling markets. It’s actually more like a weapon than a tool, however.
A Way to Win When the Market Loses
I recently introduced it – and recommended a specific use for it – to beta members of 72-Hour Income… a new service that seeks to find triple- and even quadruple-digit winners.
If you’d like to check that out, feel free to read about it here. We are still accepting new members and have only just gotten rolling. So, you haven’t missed much.
It is about the only way possible to play both directions a stock can go. The strategies we use in 72-Hour Income let readers profit from both rising markets and falling ones. After Monday, the timing couldn’t be better for such a weapon.
I urge you to at least give it a look. With so much going on geopolitically, economically and monetarily in the world right now, rocky days like Monday could become more frequent.