Tools To Protect Your Investments During A Market Rout
To say that stock markets are volatile right now is an understatement. Most stock values have plunged more than 60% since the beginning of March. We have even experienced one day drops of more than 10% on multiple occasions. They are declines that rival the Black Monday stock market crash of 1987 and the 2008 global financial crisis.
Understandably, investors are worried as they see the value of their holdings sink further into the red. However, there are some tools you can use to help protect your investments during a stock market rout — either now, or in the future. Here are five tools that you should be aware of, and how to use them to your advantage.
Stop Loss Orders
Let’s start this list with, arguably, the most important tool available – the stop loss order. This allows you to set a price, in advance, at which you will automatically sell your position in a particular stock. For example, if Apple shares are trading around $325 (like in February 2020), you can set a stop loss order to sell them if they fall to $300 per share. This helps to minimize your losses if Apple’s share price drops significantly. It recently fell as low as $240 per share, for example.
Another benefit of stop loss orders is that they can be used to lock in profits. For example, if you buy Apple stock at $250 per share and it rises to $325, you can set a stop loss order at $310. Then, if the price starts to fall again, you cash out and realize a gain $60 per share. Really, stop loss orders are an essential tool for most investors. They are one of the best ways to shield your investments from a market downturn.
Money Market Accounts
Many online and discount brokerages will allow their clients the option of putting cash into a money market mutual fund. This is a mutual fund that invests only in highly liquid instruments like cash, cash equivalent securities, and high rated debt-based securities with a short-term maturity of 13 months or less. The advantage of these funds is they offer high liquidity with a very low level of risk.
In times of crisis, money market mutual funds can be a great safe haven for investors. Especially if they are trying to sell out their volatile stocks. If you don’t want to have cash sitting idle, money market mutual funds allow you to still earn some interest. All the while, keeping it somewhat sheltered from the hurricane winds of equity markets. Money market funds work like any other mutual funds. They issue redeemable units, or shares, to investors. They are also mandated to follow the guidelines drafted by financial regulators such as those set by the U.S. Securities and Exchange Commission (SEC).
In turbulent times, it’s important to pay attention and be responsive. Creating a watchlist through an online or discount brokerage can help you stay alert. Simply put, a watchlist creates a list of your current stock holdings, as well as other stocks you may be interested in. Then, it displays their movements in real time. There is no limit to the number of stocks that can be on your watchlist. Just enter a stock symbol and add it to your list!
You can then see how that stock performs over the course of a trading day. You will see its ups and downs in real time. A watchlist enables you to make informed decisions about when to buy and when to sell particular stocks. You can also create multiple watchlists. Design one with your current holdings and another for stocks you’d like to purchase if the price is right.
While watchlists can be beneficial, you can’t watch your investments all the time. In a volatile market, things can change quickly. That’s why it can be helpful to set up alerts on the stocks you hold, as well as on potential companies you’ve placed on your watchlist. Alerts will tell you when a stock price falls or rises by a customizable amount during a trading session. Alerts can also tell you if a share price has fallen below its 52-week (or yearly) low. Or if there is extremely heavy trading of a particular stock.
Getting these alerts can help you to respond quickly. They are especially helpful if there is a dramatic change in the price or trading of a stock you currently hold. Setting these alerts will also alleviate the need for you to constantly monitor what is happening with the markets. Your alerts will tell you when big changes occur, prompting you to swing into action.
As stocks plummet, there will come a time when they hit bottom. Suddenly, their valuations begin to look attractive. It’s true that once the dust settles, a market rout does provide excellent buying opportunities for investors. However, you want to be careful when re-entering the stock market. You should have a set price in mind at which you will buy a particular stock. This is where limit orders can be extremely helpful.
A buy limit order is an order to purchase a stock at or below a specified price, allowing you to control how much you pay for it. By using a buy limit order, the investor is guaranteed to pay that price or less. For example, you notice that McDonald’s stock used to trade at $220 per share but is now down under $140 a share. You decide that you’d like to buy McDonald’s stock if it falls below $130. You set a buy limit order at $130 per share which will guaranteed you purchase McDonald’s stock if the share price hits that mark (or lower).
It’s important to note that while the price you buy a particular stock at is guaranteed with a buy limit order, the filling of the order is not. If McDonald’s stock price does not reach the price specified in your buy limit order, you will simply not acquire the stock. Still, a buy limit order ensures that you pay only the price you want for a particular stock.