Protecting Wealth When Markets Drop

Trading Tips to Protect Your Wealth and Save Your Portfolio in Tough Markets

Marcus Padley | 09 October 2024 | Education Corner

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A Bull Market Hides a Lot of Sins

When a market goes up, almost every investment approach will work, and people like me can safely sell almost any old theory on how to make money in the stock market without being wrong. When the market goes up, there is room for all, for both value investors to set and forget and technical traders to trade because every theory works, no matter how deficient. A bull market will hide a lot of sins, and in boom times, it will hide all sins, from black box theories to mail-order DVD courses, to leveraged contracts for difference over forex, to active ETFs that buy stocks going ex-dividend every month and present that as a value add whilst they return your capital in the background. A bull market allows all manner of product pushing. Even the scams ramp up.

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When the Bull Market Ends, Complacency Costs Money

But when the bull market trend ends, and it becomes more difficult, when the tide goes out, and we see who's swimming naked, suddenly laziness doesn't work. Complacency costs money, uncertainty eats into assumptions and idioms like "set and forget" and "it'll be alright in the end" are revealed as hollow hope once again.

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Inaction Is No Longer an Option

When the bull market ends, the luxury of inaction goes. When the bull market ends, even people who label themselves as long-term investors have to do something or lose the benefit of the bull market. At a minimum, just to stand still, investors have to learn to sell, and if they want to make money, they have to learn to trade.

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Trading Skills for Long-Term Investors

Traders know all this. They are 'on the ball' in all markets. Investors don't. So here are a few tips for a long-term investor faced with a turning market, a few trading lessons for someone who thinks trading is for people who sit up in the middle of the night with sunken eyes and McDonald's mayonnaise down the front of their grubby T-Shirt. That's not trading, that's gambling. Trading can be very professional, and if investors just opened their eyes, they, too could benefit.

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Trading Skills Are Relevant for Long-Term Investors

To start with, the good news for inactive investors is that investing is the same as trading, just with a longer-term time frame, and the skills used in trading are just as relevant to an investor. The only difference is the timeframe.

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A Few Basic Trading Skills to Consider

Learn a few basic trading principles as an investor, and I guarantee that when set & forget comes back in fashion, you will continue to use them. They are perpetual and universal. It just takes a bear market for some investors to wake up to them.

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1. Use Your Existing Skills as an Edge

   So, if you are still reading and are still willing to snap out of your long-term investor mindset out of complacency, here are a few basic trading skills you could think about. The first one you'll like because it is your edge over the traders. Use your existing skills. Rather than put your fundamental analysis in mothballs, use it. In a market in which share prices are driven by fear, what more valuable tool could you have than a fundamental assessment process that identifies the inherent risk in a stock? If traders think of stocks as eggs and apples, there to be traded, your edge is in having the skills to spot the good eggs and the bad apples. Fundamentals work, using fundamental overlays limit risk. They may not be the whole equation when the herd takes over, but they are always a very large part of it.

2.  Pay Attention to Market Movements

   Sorry, but the market is a battlefield, sometimes it's quiet, sometimes it's dangerous. You can't sit on a picnic rug sipping tea all the time. Sometimes you have to dive into the trenches to protect your gains. You can't pretend everything is 'just dandy' every day. Traders make hay while the sun shines and dive for cover when it rains. You can too.

3. Have a Plan in Place

   It's no good having some willy-nilly idea of what you're trying to achieve. Traders have plans. You need details: timeframe, goals, a plan. Written down (I can hear you turning off).

4. Learn How to Sell (But Don’t Rely on Stop Losses Alone)

   The Achilles heel of an investor is never selling. At this point, you probably expect me to suggest using stop losses at all times. But I won't. We have used them for years, and we have found stop losses have some serious flaws, the worst one being that they make you short term and stop you out of every stock, even the great ones, at some point. But you need something, some mechanism that taps you on the back of the head when things are going wrong that says "What are you doing?", "When are you going to do something about this?", "You are bleeding capital". It's not hard to adopt a mechanism, even on long term positions, to guard against major events like the next GFC. Setting stop losses is an obvious one, but treat them as a prompt to re-assess rather than an order to sell.

5. Measure Your Results Regularly

   Traders look at results. They pursue the activities that work and break the habits that don't. We all have bad habits, but you'll never break them if you never bother to measure or admit to them.

6. Focus on the Money, Not Your Biases

   A lot of people ruin their investment results with misplaced sentiments like loyalty to management, favourite stocks, irrational likes and dislikes. Emotional bias simply weakens your chance of success. This is a clinical game of making money. Forget loyalty, sustainability, ethics, liking, hating, favourites and the quality of sandwiches at the AGM. Anything that gets in the way of the cold assessment of share price direction is going to cost you money.

7. Expand Your Network

   Get out and amongst other investors. You need objectivity. You may think you're God's gift to investment, but there are a lot of people out there who have been doing it longer than you, know more than you do and are better at making money than you. Go and meet them. Start with the Marcus Today Stock Discussion group on Facebook, the ASA, and any other group that brings you together with like-minded investors with similar issues.

8. Make Sure to Enjoy the Process

   If it's not your thing, don't do it. You'll never succeed if you come at trading out of necessity. Investing needs to be a hobby, an intellectual pursuit, a social outlet, fun, a passion. If it's none of those, best you leave it to someone else and rely on the next bull market.

9. Trading Skills Are Accessible to All

   Trading skills are a commodity. They are a knowledge base that is static, known and easily accessible. You don't need some slow-moving over-priced seminar to learn them, it's all available, online, mostly for nothing, and for anyone interested, there are some great software packages and platforms, great videos on how to use it and, for many of us, the operation of it can become a ravenous hobby.

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