The Market Is That Crazy Friend – Here’s How to Handle It
Editor’s Note: Did you catch Marc’s latest video update on Friday?
Marc is releasing regular State of the Market addresses in order to help his readers navigate the frantic news media and wild market swings that have resulted from COVID-19.
On Friday, he addressed some of readers’ most pressing questions – whether now is the time to invest in gold and how much protection it can really provide.
Click here to see his latest analysis.
– Mable Buchanan, Assistant Managing Editor
We all have that one friend who is a hot mess…
That friend who, when things are good, is the most interesting and fun person you know. There’s no one else you’d rather spend time with.
But when things aren’t good, ooh boy, they’re a path of destruction.
The market is your hot mess of a friend. For 11 years, it was on its meds (quantitative easing and low interest rates), and the market moved steadily higher. It was a blast. Everyone was making money and wanted to be in the market.
But then it started freaking out about the spat between its buddies Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman over oil prices. And when COVID-19 came to town, the market lost its mind.
A sell-off, even a severe one, is understandable. The virus is wreaking havoc on the economy. Ten million Americans have already filed for unemployment in the past two weeks.
Last week’s 6.6 million new jobless claims record was nearly 10 times larger than the pre-coronavirus record. TEN TIMES!
Oddly, the market didn’t go nuts that day. But the Dow fell 1,000 points the day before. One-thousand-point swings have become routine over the past several weeks.
But 1,000-point daily swings are not normal. That is your friend hurling a glass of beer into the wall because a woman wouldn’t talk to him. They’re both volatile.
Years ago, that friend came to the city where I was living. He was what could only be described as a financial parasite. My wife and I met with a counselor to figure out ways to handle the situation. The advice we got was invaluable and is applicable to the markets.
The counselor told us…
Determine ahead of time how much money this will cost you. That way, when you reach your limit, you know that you’re not going to give him any more. It will help take the emotion out of saying no.
For investors, that means placing stop losses on your positions. If the market heads further south, you know in advance where your exit is. The Oxford Club, Wealthy Retirement‘s publisher, recommends setting these at 25%.
If the stop is triggered, there’s no rationalizing that things will get better and the market didn’t mean it when it slid by 1,000 points for the third time in a week. You’re out.
“You’re not here to party with him.”
My friend has a substance abuse problem. We were advised that we should not drink with him or allow him to drink in our home.
This is not the time for investors to think about partying, either. In other words, curb your active trading. The market’s wild swings mean you’re more likely to get stopped out.
Unless you have a real edge in a particular style of trading, it’s a good idea to wait for this storm to blow through.
“Remember why you’re his friend.”
This was great advice. My friend has been a train wreck for years. It’s easy to get mad and frustrated at him. But deep down, he’s still the person who I met in seventh grade and love like a brother.
The market is the same. It can make you furious. It can make you cry, and it can make you so frustrated you want to hurl your laptop across the room.
But remember why you’re invested in the stock market. Long term, it is your best friend (financially). No other assets perform better than stocks over the years.
Invest in great companies that raise their dividends, and you and your friend will enjoy great times together again.
You just have to get past the crazy that’s going on right now.
P.S. Be sure to check out my State of the Market videos, released every Friday, for my take on what’s going on in the markets.
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About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.