If we are nearing a market peak, what can we do to protect our assets and secure our gains from the “Trump bump.”? One of the ways you can protect your stock investments from swings in the market is by setting up a “Stop Loss” on your stocks. A Stop Loss works like an automatic trigger to sell your stock whenever the price of that stock falls below your price point. Some investors use a specific percentage value, like 5% or 10% – depending on the volatility of the stock – to limit their loss on any one stock.
Be careful when you set up your stop loss. Don’t be confused with a stop limit. A Stop Limit will sell your stock when it reaches a specific amount. What happens when there is a significant development overnight or over the weekend, and the market (or your stock) “gaps down” below your set price? If you use a Stop Limit, you will still be left holding that stock, because the stock price did not progress through your set price, it jumped over (or in this case under) it.
Asset Allocation is an important concept to understand when it comes to the Stock Market. In general, asset allocation consists of dividing your investments across the three major classes of assets: stocks, bonds, and cash. The percentage allocation across those three classes would define your “risk tolerance” – as stocks carry the highest risk and cash is the lowest risk. This is a useful approach, if you don’t intend to monitor your investments and just want to “fire and forget” about it.
Some investment advisors go one step further, and recommend different classes of investments within the stock portion of your investment portfolio. They will say you should hold different percentages of value stocks, large cap stocks, small cap stocks, and growth stocks to “diversify” your holdings. But what happens if there is a significant change in the economy and a bear market ensues? In that case, it doesn’t matter what type of stock you are holding, as all of them will be negatively affected. Since bear markets typically last one to three years, you are better off protecting yourself with stop loss triggers or getting completely out of the market when things go south.