History has shown that there is no more consistent wealth creator in the United States other than the stock market. That lesson is hard to remember during panic-driven selling frenzies and bear markets. And when investors see their accounts losing money, they often tend to panic rather than thinking rationally. This is where strategic investing may matter more than any other times in the markets.
There are actually many strategies that strategic investors and regular investors can use during times of panic. It would always be more useful to have known when a market panic was coming in the first place, but even then many investors would simply choose to not act.
Strategic investors assume that markets and the major indexes rise over time. That doesn’t mean every aspect of the markets will rise. Some stocks and sectors may even fall into a “rotational to avoidance hell” if their businesses become obsolete in time.
Oggonomics wants to explore some old strategies for investors who are caught off guard during major market sell-offs. The tariff hit to the markets from President Trump’s policies are actually not new (he did run on these), even if interpreting the extent and duration remains up for serious debate. It was the degree of the tariffs and the commitment to stay the course no matter and “take your medicine” that have helped lead to such sharp selling.
There are actually investing strategies that should work over time, even in such a period of uncertainty. We should all remember that a tariff situation should not be the same sort of event as the instant economic closures tied to the 2020 pandemic. That doesn’t mean there will not be disconnects in the markets, not at all.
Oggonomics has prepared 12 strategic investing strategies with some brief explanations about what will help longer-term investors get through a market that is ruled by fear and uncertainty. There are some base assumptions here, which of course come with no guarantees:
- markets do eventually recover in time
- all markets tend to overreact on the downside and upside of news
- the Efficient Market Hypothesis won’t bail you out tomorrow (or at all)
- cooler heads usually win over those who jump in and jump out on a whim
- companies that have long histories with wide competitive moats win over time
- new companies with unproven models may not win over time (many will fail)
And do not forget the advice of Warren Buffett — Be fearful when others are greedy, and be greedy when others are fearful.
So, here are 12 strategies that are useful as strategic investing tools to take advantage of major market pullbacks. Please note that these are in no order by ranking at all. And please also remember that you should consult a financial advisor for any major investment strategy. These strategies are intended to ease the burden of major sell-offs rather than to become the world’s greatest short seller — and these strategies also come with no guarantees of success.
1) REMEMBER “TIME IN THE MARKET”
You have heard to never time the market. Some agree, And many will show you how wealthy they became using their strategies to time the market. Most long-term investors will tell you that it’s your time in the market (in years or decades) that wins over time rather than only investing after massive sell-offs trying to catch the bottom. Think about it this way — If you weren’t mentally there to invest in bull markets, how do you think you will have the mental faculties to buy when everyone else’s panic selling is marking a bottom? Now keep in mind that most bull markets owe roughly half their gains to a few trading days per year. And most seasoned investors will admit they cannot tell you ahead of time when those days are most likely to be seen.
2) MAKING YOURSELF BUY
Buying into a major market panic is not an easy feat. “I don’t want to lose more money!” is a common fear that every investor may face in the mirror. This doesn’t mean you have to go gamble all your cash at once — nor in entirety! Those who have bought after every major market crash have eventually been rewarded quite well if they are buying the top companies or major market indexes.
3) AUTOMATIC BUYING
If you just cannot stomach the thought of manually buying into bad markets at lower and lower prices (or even rising markets at higher prices), you can always opt for automatic investing. This is where you set it up where your brokerage firm or advisor will buy in certain dollar increments weekly, monthly, quarterly or annually. This can be done for stocks, bonds, ETFs, mutual funds and even in Bitcoin and other assets. This is a forced discipline that effectively mirrors a 401/K contribution by taking a percentage of every paycheck to invest.
4) USING LIMIT ORDERS FOR BUYING DIPS
While making yourself buy in times of panic or automating purchases are already mentioned, worried investors can always set limit orders on a “good til cancel” basis to buy if stocks or indexes fall to a certain point. In the tariff impact, many established stocks have fallen back down to the depths of the March-2020 panic selling extremes. Just remember that if you set your account’s orders to a “good til cancel” that your account will be set execute that order at a fixed price set by you whether you wanted it to happen that day or not.
5) ROTATION & REBALANCING
Strategic investors who believe in long-term investing understand that there are times certain asset classes or certain companies/sectors are going to do better than others. There is no reason to keep putting money into a strategy if you feel it isn’t going to recover or return to what you expected. That means that you can always rotate into dividend-payers or bond-like investments rather than chasing last year’s hottest growth stocks that may be punished much harder than a broad market index like the S&P 500. And when portfolios see major gains or losses, sometimes a rebalancing is required to limit risks — either locking in major gains to move to safety, or moving out of certain assets into safety. Just be sure to speak to an advisor if you have no experience with this because it’s easy to rotate or rebalance at the absolute worst times.
6) SAFE DIVIDEND STOCKS
There are many companies that pay dividends, but companies with decades of dividend-paying history and with decades of earnings power often hold up better than growth stocks and those which rise rapidly or crater based on economic sensitivity. The Dividend Aristocrats with 25 years of consecutive dividend hikes have certainly proven themselves worthy over time. They may underperform because of their “safety premium” in runaway bull markets that reward growth over stability, but generally they are expected to hold up better in periods of caution and uncertainty.
7) KEEPING STOP-LOSSES IN CHECK
Using a set stop-loss on your investment strategies is not always easy. It’s easy to set a stop-loss at 5% or 10% (or worse), but many investors worry they are selling at the peak pressure when they should have been buying instead. That said, using a stop loss strategy will prevent the likelihood of a portfolio from seeing a 10% loss turn into a 50% loss. And just remember that the laws of market finance are worse going down than they are good going up — taking a 50% loss in an investment requires a 100% gain from that loss just to get back to even!
8) SELLING LOSERS PROPERLY (TAX LOSS HARVESTING)
Many investors have multiple investments they have owned for years and years. It’s easy to just say “cut the losers and keep the winners” but it’s harder to stomach a big loss at a given time even for seasoned investors with decades of experience. Sometimes it is simply better to trim losers entirely or down to more reasonable levels and to let the winners ride. This selling strategy is also used as a tax-loss harvesting strategy when looking to limit capital gains taxes after locking in big gains. You should always consult an advisor and a tax professional when considering this (and not repurchasing the same asset back too soon).
9) BUYING MARKET DISCONNECTS
There are certain times when markets go into panic when even the stocks, commodities and asset classes that should fall (or fall as much) also reach their own panic-selling. Generally this happens when margin calls and forced liquidations come into play. There is an old maxim around margin calls and forced liquidations — “Whatever can be accessed and utilized as a source of funds will be used as a source of those funds!” There are times when gold and closed-end bond funds decouple from their safety nets during stock market panic. It is because they are easy to liquidate and use for whatever funds are necessary.
10) USING PUT & CALL OPTIONS
Stock and index options can be a very helpful tool in earning additional income or limiting risks. Writing call options can add income if the strike price is not hit, but they can also create forced stock/index sales that result in taxable situations. Buying put options can offer wonderful downside protection for investors who worry about a market crash because these effectively act as downside insurance for your portfolio. Just remember that if you buy put options on SPY/QQQ or your favorite stock after a major sell-off rather than normal buying or selling days (or when the VIX is very high) then you are going to pay a much larger premium for that downside insurance.
11) USING A ROBOADVISOR
A relatively new strategy for investors wanting to win from ups and downs and to miss out on the major dips is by using a roboadvisor. This is offered by most major firms and the goal is to be properly invested when markets are rising and knowing how to pivot before markets slide into crashes. You need to be careful about which strategies you pick because every roboadvisor strategy is different. They might not also be capable of short selling ahead of or into major market corrections — and some models may have timing issues that sound great but perform horribly due to their model’s timing.
12) NEVER FORGETTING ABOUT BASIC NEEDS
One strategy that should always be used, and certainly before rough times in the market, to always keep cash or reserve assets for basic living needs. If you use all of your liquid assets in any of the strategies mentioned above, what good will it do you if you used up all of your reserve assets and liquidity you needed to live? None of the strategies mentioned above come with guaranteed assurances of success even if history has proven to be kind. Another old financial market maxim to keep in mind — “Markets can remain irrational for much longer than you can remain solvent!”
