2017 was a terrific year for the global stock markets. The Dow Jones went up by 35% in 2017, NASDAQ up by more than 40%, the Chinese markets were flying, as were the Japanese, Korean, Brazilian and Indian stock markets. Even the European markets did very well despite the furor over Brexit, going up by more than 30%.
But 2018 – at least the first four months of 2018 – has been a different story so far. The British and European stocks have broken through the key technical levels and have entered the “bear” territory. In the United States too, the stock markets have fallen quite a bit and have been volatile for much of 2018 despite excellent news as far as the economy and jobs are concerned.
Robin Griffiths, chief technical strategist at international currency investment firm ECU Group, says that the markets have reached what is called as “death crosses,” which means they have fallen below their long-term trend line and this line is crossed by the short-term trend line.
Mr. Griffiths explains in an interview with CNBC, “If you’ve seen a dead cross you’ve probably seen a bull market and you’re now in a bear. Some (markets) have formed dead crosses and the message from the charts are the U.K. and core Europe have formed dead crosses and there’s a very high probability they are now in a bear market.”
What’s causing the sudden fall? It could be the recent sell-off in technology stocks such as Facebook because of the public outrage over the violation of privacy by these companies.
Other factors are the rising interest rates, fast rising oil prices and the fear of a global trade war between the United States and China. Nobody wants that. The markets reach much in advance to possible bad news, which is why we have this current volatility in stocks across the world.
So what can you do to protect yourself when the markets take a turn for the worse?
#1: Liquidate Risky Positions –When you see danger signs ahead, don’t waste any time in selling risky positions such as high beta stocks. These are the stocks that are going to go down quickly when the market falls. Hold on to your positions in blue-chip companies.
#2: Learn the art of short selling – The smartest investors are those who are capable of insulating themselves against any fall in the stock market. A smart investor is bullish when the market is on an upward trajectory. But it doesn’t take him long to change his stance and turn bearish and profit from the decline in stock prices through short selling. Short selling is an art which you will have to learn through the study and practice of techniques such as technical analysis.
#3: Hoard cash – Cash is king when the markets start falling. Stop reinvesting money back into stocks when you sell and instead hold on to the cash. This will protect you against major portfolio losses and get through the storm unscathed. When things improve, you can start investing again.
#4: Move to the bond market – At this point of time, you should start buying into fixed income instruments such as bonds. This can help you weather the stock market fall somewhat. The bond market is comprised of various debt securities that pay you a steady cash flow.
#5: Start buying – What makes great investors different from an average investor? The average investor buys when the market is at a high and sells everything in panic when things are looking bad. Buy high and sell low – you can see why this is such a self-defeating strategy. What a great investor does is to analyze stocks, stay away from the markets when everyone is buying and take the opportunity to buy great stocks at a discount when everyone is selling.
Buy low and sell high – this is a simple enough concept, but much harder to execute when there is real money involved. Follow the steps outlined above to protect yourself when the stock markets start declining.