A rising market makes even your mother-in-law look like a stock market genius. But a falling market – like the one we’re in now – has the opposite effect. It can make the most knowledgeable investors look like fools.
Even the price of companies with strong earnings or companies that are cheap compared to the value of their assets can drop when the market goes south. So… does that mean you should sell those stocks? Even if they haven’t hit your pre-established stop-loss point? (You should, of course, have stop-loss points for all your investments. Mine is 25 percent off the stock’s peak price.)
That’s not a bad idea if the company is in a sector known to fare poorly during a recession – e.g., a company that makes big-ticket or luxury items. But if it’s in a sector known to do well during recessions – like manufacturers of household goods, alcohol suppliers, or tobacco companies – there may be no need to sell. In fact, this may be a good time to load up on those sectors.
But you should also do some pruning.
If you have some stocks that are already way down – stocks in sectors that don’t usually do well in a recession – don’t be tempted to keep them because you feel most of the damage has been done. They could go down a lot more.[Ed. Note: ETR’s Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]