Monday, March 07, 2016
10 Ways to Prepare for a Stock Market Crash
10 Ways to Prepare for a Stock Market Crash by Lawrence Meyers
Date : 21st Jan 2016
Wall Street is off to a terrible start to 2016. The broad indices are falling — as of this writing, the S&P 500 is off 8% in just three weeks — major technical indicators are now in bear market territory, overall economic data is miserable and earnings are being revised downward.
None of this is good for the market, and I think we are headed for more downside — possibly a market crash.
So what precautions can you take against a stock market crash? Well, a lot depends on your own risk tolerance. There are many choices, and the level of your conviction will determine the strategies that are best for you to prepare for a market crash.
I have 10 suggestions, from conservative to aggressive. And as a note: My strategy in general with a stock market crash is to do a little bit at first, and as the decline gets worse, pile on to the strategy even more.
#1: Always set stop-losses.
You’re not always going to be hovering over your computer ready to tinker with your brokerage account at a moment’s notice. And that’s why the stop-loss order is an investor’s best friend. A stop-loss order simply lets you sell your stock at a predetermined price, or buy shares once they hit a certain price. You can do these either on a dollar basis or a % basis. So, for instance, you could set an order to sell your shares of Apple Inc. (AAPL) once they’ve fallen 10% from the time of the order, or you could set an order to sell your shares of Apple once they reach $90. You decide how much pain you’re willing to endure, and let the market do the rest.
TEH : CUT-LOSS is a MUST ... even if it is PAINFUL. Recently I have to cut-loss POS as the support RM2.20 broken. This is my worst trade for 2016 .... and it is just 2 months into 2016. Yes, I have done many-more good trades but the fact that CUT-LOSS is painfully IMPORTANT, we must exercise that.
So ... whatever stocks we are buying and holding now ... REMEMBER to place a cut-loss point. We do not want our fund to be STUCK into those non-performing ones ... and seeing it drifting lower and when market crashing down, WHATEVER we are holding will be give 30-80% discount.
#2: Stay the course.
The easiest and best choice regarding a market crash is to do nothing. If you own a long-term broadly diversified portfolio, you can ignore the market and focus on the long-term, because 30 years from now this decline will look like a blip. My biggest lesson in diversification came during the financial crisis. The market was down 55% at its worst, but my broadly diversified portfolio was only down 35%. That might sound like small consolation, but considering I clawed my way back to breakeven before the rest of the market, then went positive before anyone else, I felt pretty good about my overall strategy.
TEH : TOTALLY disagree ... it is kinda silly to ignore the crash ... perhaps, I do not have 30yrs to see the return. I would rather SELL ALL and get out in 2016 rather than still into equities ... diversifying etc etc. So ... my point will be GET OUT FOR GOOD la ... then wait for crash to buy. Many 'newbies/novices' told me they will buy during crash ... and not now, I was like ... "ARE YOU SURE? Without experiences and knowledge HOW is one going to do that? Market corrected 5%-10%, all yelling crash ... and you are buying during REAL crash?" ... These are from naïve investors/traders .... or someone have misled them. Well ... told everyone that market is the only place people do not want to use brain to think.
Look .... if you do not dare to ride the roller-coaster, FORGET about bungee-jump or diving from plane, ok? GET REAL leh ...zzz.....
#3: Raise cash.
If I believe in a company and it is up significantly since I bought the stock, I won’t touch it. For example, I’m sitting on a 70% return in Walt Disney Co (DIS) even with the current decline. I don’t care. The company will survive. However, if I own a position that is 5%-7% from breakeven, either up or down, I will sell out and take the cash. The idea is that if I truly believe we are heading lower, I can get back into the same stocks at lower prices, or reallocate to other opportunities that become available.
TEH : This makes better sense than #2 ... sell first, raise cash ... get loans, sell house ... car ... underwear. Raise that CASH as cash is king during market crash, ok?
#4: Hedge with modest short positions.
One thing I’m doing right now is hedging my overall portfolio by deploying available cash into some inverse ETFs. This will give me downside protection against my long positions that I intend to hold. I opened a 2x leveraged short in the S&P 500 using ProShares UltraShort S&P500 (ETF) (SDS), short the MidCap 400 using ProShares Short MidCap400 (ETF) (MYY), short the Nasdaq 100 via ProShares Short QQQ (ETF) (PSQ), and am shorting the Russell 2000 via ProShares Short Russell2000(ETF) (RWM). This all comes to about 20% of my total portfolio, so I haven’t shorted everything, but I have set up a solid short position to hedge.
TEH : In KLSE ... we could short-FKLI (future months instead of spot if one is not trading) for hedging purposes. But ... FKLI is manipulated and not liquid. Well ... it is still an idea to hedge.
#5: Sell covered calls.
You can use options to hedge your positions as well. Take any stock or ETF you own, then sell covered calls against it. That means you are being paid so someone else has the right to purchase your position from you at a given price on or before a given date. So you collect money for selling the contract, and if the stock price is not above that strike price you contracted at, you also keep the stock. Thus, you’ve collected some funds against your position that hedges your downside. Now, you will pay capital gains taxes on those profits, but you may end up offsetting them if you harvest losses during the year.
TEH : I have not reach the OPTION-TRADING stage ... but I m moving into CFD-trading now ... where we could short some selected US stocks. Yes ... must learn how to short stocks, including KLSE's counters.
#6: Purchase puts.
The opposite of selling covered calls is to buy puts on any stock or ETF, whether you own it or not. Here, you are buying the right to “put,” or sell, that security to someone at a given price on or before a given date. You don’t have to hold the stock, because your broker will trigger a matching buy order at that same price. It’s a bit like shorting a stock, except you don’t actually borrow shares to sell until the exact moment of execution, when the shares are then immediately purchased by the put seller. If the price falls below the strike price you contracted for, plus what you paid for it, your difference is the profit. Thus, you’ve made money on the downside.
TEH : I will NOT buy put-warrants which traded in Bursa. EXTREMELY risky. No comment for those trying that. Good luck.
#7: Short Highfliers.
Another alternative, if you really believe the market is going to fall, is to hold onto your longs but short the highflying stocks. These are the most vulnerable to fall with the overall market. Stocks like Netflix, Inc. (NFLX), Tesla Motors Inc (TSLA), Google (GOOG, GOOGL) and Facebook (FB) are the companies I’m suggesting. You have to be quick on the trigger and very nimble. If the market turns back up, they could regain momentum. However, on the downside, they are likely to fall more than the overall market, meaning you may be able to hedge your long position very efficiently.
TEH : Yes ... if we see the stocks keep going to new high and way above the valuation, a good way to profit from the market-crashing is to SHORT these high-fliers. Ok ... will SHORT Tesla next week.
#8: Reallocate equities into exchange-traded debt.
This is a strategy that I just thought of last week. The stock market has been in a terrible place, yet exchange-traded debt is doing just fine. In fact, many issues are seeing buying interest and pushing prices up. Even when they went down, they didn’t fall nearly as much as the overall market — not even close. The reason is that this is debt and not equity. It’s much safer to invest in debt, so consequently the ETDs tied to debt issuances are becoming a kind of safe haven. You can even get paid interest while you wait out the tough time.
TEH : No comment
#9: Reallocate equities into preferred stock.
This is basically a similar concept as moving into ETDs. In this case, you are moving out of common stock to a stock-bond hybrid that is preferred stock. Most of these issues have been relatively stable as well. Preferred stock is tied to only one thing — a company’s ability to make good on its preferred dividends. Well, the common stock falling due to a lousy market has virtually no bearing on this issue. Thus, you can move into preferred stocks, which will hold value and pay dividends quarterly. Remember, though: Selling out of stocks may trigger capital gains.
TEH : No comment
#10: Sell out and go short big-time.
Frankly, I don’t advise this except for aggressive traders. This isn’t investing. Here, you are selling out of all your long positions, taking whatever capital gains or losses with you, and shorting the heck out of the entire market and/or individual issues. Now, if you think the market has a definitive short- to medium-term bias, then go for it. You can do very well. On the other hand, be aware that the market’s long-term expectation is to go higher. So you have to know exactly when to cover your short position, lest you get caught in a monster rally.
TEH : This is what I m preparing to do ... after 2016 (I said liao la ... 2016 no crash leh) ... prepare for BIG SHORT by mid-2017. If KLCI going up to 2000 level, SHORT leh. By then, the IBs and many sifus coming out .... yelling 2500 or 3000 level for KLCI and all the FEAR of crash disappear. I HOPE such situation will occur ... but highly unlikely ...
SHORT HSI or DOW, then.