What Should Individual Investors Do With All the Fear in the Stock Market Right Now

by David Ning · 12 comments

bull and bearLet’s face it. We as individual investors are very afraid right now. Did you notice all the articles from us personal finance bloggers about the market throughout the year and the lack of them right now? Part of it is because we all want to cover the thanksgiving spending etc etc, but it is also because many of us don’t even want to think about our investments. If March or August of 2007 was a fearful time for individual investors, now is many times worst.

So, what is our investment advice now? What should we do in these times when people are telling us that the decline just started because all the mutual fund investors (the general public) will start selling once they receive their quarter statement and realize that their investments returned nothing for the past year?

Instead of giving some general advice, let’s break it down to different types of investors so the advice is more specific. There are three types of investors: passive investors, stock pickers, and short term traders.

Passive Investors – I hope this includes most of us because it takes a considerable amount of time to invest in stocks. We buy low cost index funds and have a long time horizon. For us, we shouldn’t care about volatility and we should buy more shares right now. Even better, we should setup automatic investing so we keep investing whether the market goes up or down. If you are very unemotional about your investments and have a VERY LONG time horizon (5 – 10 years+), you may want to look at the financials but buy the ETF that looks at the whole sector instead of buying a specific stock because you are a passive investor.

Stock Pickers – Many of us fall under this category. We use a portion of our money to buy into certain stocks because we feel like we can outperform the market. Those of us that buy individual stocks should move into defensive stocks. Just think of all the companies that people would still buy from no matter what the economy does. P&G is a great example because they sell many day-to-day products like soaps. These types of companies aren’t exciting in bull markets but they deliver the necessary consistency that people can count on in a bad economic environment. Now is not the time to bottom pick financial stocks. Even though they may seem very cheap to you, it may just keep going down in the short to midterm. Just wait till these stocks seem to keep going up to jump back in but there is no reason to get in at this point.

Short Term Traders – Well, I’m just going to state the obvious for you guys since you probably shouldn’t be trading if you don’t know this already. I would either see which stocks/sectors you can short or just sit and do nothing. There is absolutely nothing wrong with doing nothing. Sit with your cash and just wait till there is a bull run again. Whether it is 3 months or 6, you can just ride is out.

Mixture – In the real world, almost all of us fall under a mixture of all 3. If we are smart, we will try to separate into 3 different portfolios and follow the strategies accordingly because it will be impossible to not get confused.

Now is a fearful but interesting time. What we do during these volatile times is much more important because we can really destroy our portfolio and wealth by acting inappropriately. Whatever you decide to do, not losing money should be number #1 on the list. To help that, the first thing we need to do is stop investing based on headlines.

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{ 12 comments… read them below or add one }

Fiscal Musings November 27, 2007 at 12:07 pm

Dollar Cost Averaging is always a great strategy, and you can get quite the bang for your buck in the current market. All in all, I wouldn’t worry too much. You shouldn’t be investing money that you need to live on anyway.

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MoneyNing November 27, 2007 at 3:49 pm

Good thinking. Just keep buying if you are the 1st type of investor mentioned in the article..

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ningpo November 28, 2007 at 12:42 am

no loan is a good loan. if there’s a tax advantage (mortgages), use it with an equal account whose purpose is to be able (when the shit hits the fan) to pay it off. 2. absolutely, dollar cost averaging works, but stepping aside , taking losses early is far better than getting hammered. at the cost of commission, when the technicals turn, re enter, even at a premium. think safety, no falling knives and who knows where the bottom is on this one. Success to you which ever kind of investor you are. personally, i’m standing aside for awhile, that doesn’t mean i’m not still saving (oh, double negatives) ::-) i am saving, outside the reach of the shark tank.

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ningpo November 28, 2007 at 12:46 am

portfolios portfolios, did you read the article on greenspan, he held one stock for over a period of almost thirty years, it made him millions. i didn’t like his choice, but it worked for him, good returns and the highest dividends to boot. success

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ningpo November 28, 2007 at 6:26 am

“Here’s What I Suggest You
Do to Protect Yourself…

First, keep a large chunk of your money in safe investments like short-term Treasuries. They’re your ultimate insurance against “S&L Crisis II.”

Second, protect yourself further by continuing to avoid vulnerable sectors of the market — home builders, lenders, construction suppliers, and the like.

Third, stick with contra-dollar investments like precious metals and foreign stocks and bonds. The Fed will be forced to keep monetary policy easy to cushion the pain of the housing crisis. That, in turn, should hurt the dollar.

Fourth, if you’re more aggressive, consider hedging your portfolio by shorting stocks in vulnerable sectors or by purchasing inverse ETFs.”
http://www.moneyandmarkets.com/Issues/SpecialReports.aspx?NewsletterEntryId=1224
when someone is right on, just quote’m::-)

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MoneyNing November 28, 2007 at 2:29 pm

ningpo: Thanks for your advices :) I would just avoid the sectors instead of shorting them since they’ve been beaten down so much already.

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ningpo November 29, 2007 at 12:23 am

good point, esp. after yesterday and given the the volatility is pumped. danger zone ahead.

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Mark @ TheLocoMono December 4, 2007 at 10:32 am

Personally, I have been alive long enough to remember all the hubbub about the stock market going up and going down that I don’t really care for it much anymore.

Although I am not a stock picker, the recent violatility of the market has piqued my curiousity about option trading.

Can you recommend a good book?

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MoneyNing December 4, 2007 at 8:20 pm

Mark: I’m not into options so I cannot recommend a book. However, how much do you know about it?

For basics, I would just go on the brokerage sites since many offer presentations on basics like options trading.

Good luck though. Options trading is even more riskier than stocks trading so becareful.

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Mark @ TheLocoMono December 10, 2007 at 11:24 am

I know some things about options trading. I have done some “mock” trading and fared all right with them. I just know that the more you know, the better.

Risk is inherent everything related to the stock market. At best, the most anyone, even a seasoned veteran will be able to make an investment decision will always have risk involved.

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PerfectMOney February 25, 2009 at 1:59 am

Be Relevant with economy plunge is what safe way to counter the fear,and if Individual Investors do not want to miss the chance of “Gap economy plunge”.I think rather spent some money for Trading the stock ,I more agree to trade the money to “Marketing Investment”and the idea of it is spending your money to “affiliate commerce look like.with proper technique and tricks ,in my opinion this is what most safe heaven to keep my money “works for me

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Playground Equipment October 18, 2010 at 7:39 am

My advice is to not freak out. Just keep investing your money and diversify it. Historically we have good times and bad times. Right now we are in bad times. That is often the best time to get the best buys on stocks. Don’t be a dummy and buy high (when the market is good) and sell low when the market is bad. Do you homework and buy the best stocks in the market at the best values. You will be glad you did this when the market gets better in the future.

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