Apart from a brief glimmer of hope in March, 2022 has been one long, slow-motion train wreck in the stock market.
I’m not a market timer. I won’t pretend to know the exact moment things will turn around.
That day will come, of course.
But for the moment, there’s a distinct downtrend. Sellers are overwhelming buyers, and the trend won’t break until the selling stops.
So let’s take a broad view of the situation and create a game plan.
What Caused This Market Crash?
We humans have a need to know “why” things happen. But in the stock market, it’s never simple or straightforward. The same headline that appears to make the market rise one day causes it to nosedive the next.
Stepping back and looking at a macro picture, we know that stocks entered this year with extremely high valuations by historical standards.
We also know that the most stimulating Fed policy in history following the onset of the pandemic was a major factor in manifesting those valuations.
Now, an inflation spike has caused the Fed to move faster than expected on its plan to drain all of that excess liquidity out of the economy and, by proxy, the capital markets.
This is single biggest macro factor in play for this market crash.
Why did investors suddenly start caring in January after choosing to ignore it for the previous year?
We don’t really know. We have to remember that the stock market isn’t a logical machine. It’s the collective buying and selling decisions of millions of investors.
What Do We Do? Start With Your Cash Level
I don’t try to predict precise market turning points. I’d have better luck trying to guess the precise minute of my 2-year-old daughter’s next temper tantrum.
But I do position my investments in such a way that I don’t have to time anything.
To start, it’s always important to have a little cash on hand. That’s one of the secrets to Warren Buffett’s success. He always has cash available to deploy when an opportunity comes along.
Plenty of investors are smart enough to buy in a bear market. They just lack the cash to do it because they were fully invested when the downturn dragged prices lower.
You don’t need to liquidate your portfolio. But I think it makes sense to have a substantial cash reserve right now.
“Substantial” means different things for different readers. But I think, as a general rule, having 10% to 20% of your portfolio in cash is the minimum right now. More is ideal.
What Do You Sell and Not Sell During This Market Crash?
Remember that no sale ever has to be permanent. You can always buy back later.
I’d recommend waiting at least 30 days to avoid wash-sale rules. But before you waste time agonizing over a speculative growth stock, just remember you can always buy it back later.
I’m a lot more reluctant to part with a performing dividend stock.
Yes, the same logic holds that you can always buy it back. And yes, if you truly believe the stock is overpriced, you can always sell it and hope for the opportunity to scoop up the shares at a lower price.
But if the stock is providing reliable income … what’s the rush? I’m content to ride it out and keep cashing the dividend checks in most cases.
No Plan = No Place in Your Portfolio
Before you do anything, reflect on why you entered a position to begin with and your original exit plan.
My exit plan is death for a few stocks I own. I plan to hold the stocks forever and I made that decision at the beginning.
But those investments are few and far between.
Most investments are really trades that you won’t hold forever. And when you enter a trade, you need to know the conditions under which you plan to sell.
If you can’t remember why you bought a stock … or you never articulated an exit strategy … then those might be the first stocks you sell during a market crash to build up that cash position.
And if you want more guidance throughout this rough spot in the market, give Green Zone Fortunes a look.
We have a plan for all of our highest-conviction stock recommendations within the Green Zone Fortunes portfolio, and our premium subscribers are the first to know when Adam O’Dell and I decide to move on.
Even if you are wary of buying any stocks right now (which is understandable), our model portfolio holds stocks that are chock full of potential within some world-altering mega trends like biotech and renewable energy. These are trends that are set to outlast market downturns and come out even stronger in the years ahead.
To find out how Adam is targeting the renewable energy mega trend, watch his “Infinite Energy” presentation now.
A little help can go a long way when markets aren’t playing nice.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.