There’s increasing concern that the volatility in Washington is going to seep its way into the financial markets.
Though the S&P 500 hit a new all-time high last week, it fell hard on Friday on new worries that tariffs and the Department of Government Efficiency are going to drag the economy down.
Trying to digest the political news each day and figure out how it applies to the financial markets is like trying to drink out of a fire hose.
Every day, subscribers, friends, and family members ask me how I think President Trump’s policies are going to affect the market.
What they’re really asking me is, “Is my money safe?”
It’s a natural thing to be concerned about. But there are steps you can take to prevent that question from constantly being on your mind.
Here are a few strategies every investor can use to reduce their stress about their money.
1. Think about your timeline.
When will you need the money that is invested?
I always suggest that any funds you’ll need within three years should not be invested in stocks. Anything can happen in a short period of time, so if you’ll need that cash to pay bills within three years, take it out of the stock market and put it in something safer, like a money market, CDs, Treasurys, or investment-grade bonds (not a bond fund, but actual bonds). Bond fund prices fluctuate, but if you own an individual bond, you know it will be worth $1,000 on the maturity date.
2. Use trailing stops and position size accordingly.
If you cannot afford a big drop in the market, set a trailing stop below your entry price.
The Oxford Club uses a 25% trailing stop. So if we recommend buying a stock at $100, the initial stop price is $75. If the stock rises to $120, the stop price increases to $90. (With a trailing stop, the stop price is never lowered.)
This strategy ensures you don’t take a devastating loss, and it protects your profits if your stop price moves past your buy price.
Additionally, The Oxford Club recommends that each position make up a maximum of 4% of your entire portfolio. That way, if you get stopped out with a 25% loss, your portfolio is only down 1%. That’s easy to make up.
3. Buy puts.
Puts are option contracts that act as bets on a stock or index going down. Buying puts is like buying insurance for your house. You hope you never need it, but if there’s a disaster, you’re glad you have it.
That being said, there is a cost to consider.
For example, if you buy $1,000 worth of puts to insure a $100,000 portfolio and the portfolio goes up 10%, your net return will be 9% because your $1,000 put position will be worthless. That may be a price you’re perfectly willing to pay, knowing that if there’s a bear market, your portfolio will be protected. But as with any insurance, the price is something to take into account.
4. Do nothing.
If you’re a long-term investor and have years to let your portfolio grow, you don’t necessarily have to take any action just because a bear market hits or the market tanks.
Certainly, you’ll want to keep an eye on your stocks, and if something has changed fundamentally for one of them, it may be prudent to make a change. But if it’s simply a bear market (where everything goes down but the company is still thriving), there’s no reason to sell – as long as you have time to wait for the stock to come back.
Bear markets occur roughly every 3 1/2 years, so they’re not abnormal. Even though they’re painful when you’re going through them, the average bear market lasts only 9 1/2 months.
That’s not terribly long. So if you can hold on and not get spooked out of the market – and maybe even pick up some cheap shares – you’ll do much better in the long run than if you pull the rip cord, frightened that you’ll never get your money back.
Make a Plan… and Stick to It
Start thinking now about how you’ll handle volatility in the future – because it will happen regardless of who is in the White House or Congress. It’s part of the ebb and flow of the market, and the better you can handle volatility, the larger your portfolio will be.
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