Everyone that invests over a long period of time will be forced to deal with some extremely difficult market cycles. The great certainty of the market is that there will be bull and bear cycles, but every cycle plays out differently and creates a new menu of challenges and frustrations.
The current market correction is one of the more difficult that I have faced in my 25-year trading career. Why? Because it has been so well hidden by the indexes. The business media have yet to even use the phrase “bear market” although a huge number of individual stocks are already wallowing in one.
Markets like this are just the nature of the beast, but the good news is that eventually, they will create a new crop of opportunities. The most important thing of all is to protect your precious capital so that when things turn, you will be in position to profit again.
Here are five tips for navigating an ugly market.
1. Forgo the Urge to Predict
When the market pulls back and acts like it has recently, there is a strong urge to make predictions about what will happen next. There will be those that foresee a collapse and a long and brutal bear market, while others will see a fast reversal and be anxious to buy the dips.
All those folks will have compelling and logical arguments to support their predictions. They may even sound brilliant, and because we are already feeling emotional and confused after being beaten up by poor action, we will feel the urge to agree with them. We will want to make the “big call” and implement some aggressive strategy.
The truth is that no one knows how things will progress. We don’t know where the market will be six months from now or how it will get there. After the bubble burst in 2000, very few folks thought that the bear market would drag out for years. Many folks were wiped out as they held on tightly to stocks in endless downtrends.
In 2008-2009, the bottom came quickly. There was nothing notable about the market turn, and the lows were never retested yet.
At the pandemic bottom in 2020, many folks never trusted the bounce that started in March 2020, but it was a V-shaped recovery, and many ended up chasing the market after months of positive action.
Just take it one day at a time. Don’t be sucked into the prediction game. Manage your individual stocks and protect your capital. Be skeptical of bounces, and don’t be too negative when there is more weakness. Let it play out. Eventually, the character of the action will shift, and you can put capital to work. A new uptrend will last months, and you won’t miss out if you stay reactive.
2. Operate From a Position of Strength
When we don’t feel like we are in control of a situation, we tend to make poor decisions. The default position when we are uncertain and confused is to do nothing. Inertia sets in, and we tell ourselves it is too late to act.
Your mental attitude about a market will largely be a function of how much cash you are holding and how much control you…