5 Tips to Survive the Unexpected in Wild Markets

Recession!!! Recession!!! Recession!!! That’s what everyone is shouting right now. With FED increasing interest rates & COVID-19 is starting to show its impact on economy.

Well, we don’t know the future, but we can be more precautious, no harm in it, right?

This why I have prepared this article. These tips are what got me through extreme volatile markets. And so, I believe they can may be help you in some way. So, you at least avoid losing money.

“Fortunes are made and lost by thousands of men in the stock market; they are made and kept by a few dozen.” — Edwin Lefevre

Diversification

No matter the type of investment, there will always be some risk associated with it. There are two types of risk that every investor has to take:

• Systematic risk.
• Idiosyncratic risk.

You cannot remove risk completely. But you can reduce it to some extent. Systematic risk is the risk that wraps up the whole market in it.

Diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there.

— Peter Bernstein

Some examples are natural disasters, inflation, changes in interest rates, war, and even terrorism. So, no matter what you do, you cannot avoid systematic risk.

Idiosyncratic risk is different. It is the risk associated with a company.

For example, Tesla missing its quarterly sales targets is an Idiosyncratic risk.

You cannot avoid Idiosyncratic risk, but you can at least reduce it by diversification. You can diversify your investments, in your country, across different sectors and markets. You can also use international market to diversify your investments across the globe.

Here’s a article on the type of risks.

The more diversified your investment, the less Idiosyncratic risk it has. But be sure to look at the systematic risk of other markets before diversifying there.

Book on diversification: Beyond Diversification — Sébastien Page (head of Global Multi-Asset and chief investment officer)

Hedging

Hedging is one of the best things you can do to cushion your investment in the short run. Hedging your trades/positions will allow you to stay longer than others. And the longer you stay in a trade, the more information you can collect, leading to a better decision.

When I first used hedging (in the derivatives market). I can still recall that even after the market had moved 18% against me, I had a 3–5% loss in my portfolio. In the end, I had to take a loss in that trade, but my loss came down from 18% to 5%.

I stayed in red for almost 3 hours, seeking a chance to get into green. It would be impossible for someone impatient like me to lodge on a losing trade for so long.

But I had assurance that I couldn’t take more than a 5% loss because I had hedged my position.

During an unexpected event, you are very likely to rush your decision. In a critical moment of rush, hedging allows you to take your time and make a rational & informed decision.

Make an Emergency Fund

It is needless to say. But I didn’t have an emergency fund when I was a beginner, so I need to add this one here.

You should have an emergency fund even if you are not investing. Emergency funds are helpful in getting you through tough days.

“If you do not have at least an eight-month emergency fund, and you think there’s a probability you could loose your job — and it’s not just losing your job; you could be in a car accident, get sick — continue to pay the minimum on your credit card every month. Everything beyond that needs to go to establish an emergency fund. And if you have an emergency fund saved, then fund your retirement account before paying down credit card debt.”

— Suze Orman

I have three emergency funds. One for my health, I call it Lifesaver. I don’t have many expenses, so I can manage to put 10% of my total income every month into the Lifesaver fund & this fund stays with the bank.

The second is for my investments. I call it Super Trader Fund. Whatever amount I invest, I take 10% of it into the Super Trader Fund and invest the rest 90%. And whenever I book profit, 5% goes into it. It gets tough to keep track of profits. So sometimes, I skip them if the profits are small. I use this fund only to recover losses that can affect my overall numbers.

The third fund is for miscellaneous expenses. I call it M-Fund. The amount I add in M-Fund is uncertain, but I keep adding small amounts regularly. And believe me, this fund will be of considerate size and most helpful fund if you are frugal.

M-fund is for things that are less important than my health & more important than my needs (sometimes I use it for my needs).

And the most important thing is that after adding my money to these three funds and removing my expenses, I have $0. And that’s good because it means that none of your money is sitting idle and doing nothing.

Timely Investments

Timely investments mean buying at the dip or selling at the top.

It is pretty simple. If the market is falling, you can increase your profits by buying at the lowest price and decreasing your average cost. Its called “Dollar-Cost-Averaging.” But it is very tricky and hard to pinpoint the top or the bottom price level.

For me, instead of looking for the lowest price possible & investing lump-sum.

I divide my investment across several months and try to figure out a range for the lowest price in the current month. I repeat this every month. It helps me to enjoy the “Dollar-Cost-Averaging.”

For selling at the top, I use the same formula. But when I have a profit of more than 20%, I don’t look at the stock. I put the trailing profit at 5% & leave it. It means I am risking 5% of my profit for a potential rise in price.

Be Clear

The first thing you should do is to be transparent. And you should do it even if you are making profits.

You ask yourself some questions that reflect your position in the market.

Ask Yourself

1. Why am I investing?

2. Am I investing for the Short-term Or Long-term?

3. If today’s market crashes, how much loss can I afford?

4. Do you believe the stocks that you own?

There is no correct answer to these questions. What you think is right. Is the correct answer!! Try to be as precise as possible & write down your answers. And You should build your strategy around your answers.

Here are my answers:

1. Generate a passive income stream & save for my future business.

2. I aim to always invest for the Long-term, but there are a few exceptions (If you also have an exception, then list them down)

3. I can afford a loss of 3%, but if the situation is not dire and I can see, things might get normal soon. Then I am willing to risk 3–5%.

4. Yes. My stocks have well built fundamentals & they might dip if the market goes down. But I can’t see them staying down when it is rising.

Lastly, Here are some books on investing and personal finance that can help you grow.

The Millionaire Fastlane — M J DeMarco

The Little Book of Common Sense Investing — John C. Bogle

Common Stocks and Uncommon Profits — Philip Fisher

The Simple Path to Wealth — Money Mustache

The Psychology of Money — Morgan Housel

The Intelligent Investor — Benjamin Graham

One Up On Wall Street — Peter Lynch

#DontGiveUp

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Affiliate Disclosure

Kishan Prajapati is a participant of Amazon Services LLC Associate Program. As an Amazon Associate I earn from qualifying purchases. This post contains Affiliate Links, means If you click on any of those links and make a purchase within a certain time frame, I’ll earn a small commission. The commission is paid by the retailers, at no cost to you. This is how it supports me to keep doing what I love.

DISCLAIMER: This write-up is for informational purpose only. It does not serve purpose of any legal advice. You are solely responsible for making your own investment decisions. If you choose to engage in such transactions with or without seeking advice from a licensed and qualified financial advisor or entity, then such decision and any consequences flowing therefrom are your sole responsibility.