At the start of May, the market reached its highest level since November 2009. It could have been an excuse for stocks to go even higher, but that didn’t happen.
When shares go up, typically small-cap stocks lead the market higher. When shares go down, typically small-cap stocks lead the market lower.
You can see that reflected in the chart below.
Now, we won’t focus on the causes of the falling market. You can put it down to a number of things: US unemployment and employment numbers; European national debt problems; European bank problems; commodities prices; and the Australian federal budget.
Instead, we’ll focus on what you should do when the market falls like this. Should you sell your stocks? Should you leave everything alone? Or should you buy more?
Well, we know it’s a trite saying, but the time to decide what to do when the market crashes is before the market crashes.
Making a decision to sell, hold or buy during a crash likely means you’ll get it wrong.
For instance, in our personal retirement portfolio we haven’t sold a single stock.
Why? Because we’re comfortable with how and where we’ve invested our money.
We have a bunch of cash earning interest (probably less interest thanks to the Reserve Bank of Australia’s interest rate manipulation), we have a few dividend paying stocks that are still paying a dividend, and we own a handful of micro-cap stocks that we know could either halve in value or double overnight.
Oh, and there are the gold and silver investments too.
In short, whatever the market conditions, we’re always looking to be a buyer rather than a seller.
If you find yourself selling a stock you own in this market, it most likely means you were over-invested in it. And it’s never a good idea to be in that position. All we can do is suggest you follow our advice and split your savings into ‘safe money’ and ‘punting money’.
We’ve outlined this idea here in Money Morning several times since the middle of last year. The breakdown looks like this:
Remember, this is just a suggestion. As an example, here’s how we’ve allocated our retirement savings: 35% cash and term deposits, 40% gold and silver, 15% dividend stocks, and 10% punting stocks.
But just because that suits us, doesn’t mean it will suit you. You may prefer to allocate more or less in each of these investments. It comes down to what you’re comfortable with.
The bottom line is to make sure that if you do want to sell a stock it’s always on your terms rather than when the market scares you into selling.
Kris Sayce
Editor, Australian Small-Cap Investigator
From the Archives…
Free of the Dragon: Why the Energy Market Doesn’t Need China
2012-05-25 – Kris Sayce
China Stirs Up Troubled Waters in the South China Sea
2012-05-24 – Dan Denning
How Chinese Stocks Are Fading Fast
2012-05-23 – Lars Henriksson
LNG: Why Australia Will Be a New Global Gas Leader
2012-05-22 – Dr. Kent Moors
A Shocking Week for China’s Economy
2012-04-21 – Dr. Alex Cowie
Use This Investment Strategy to Avoid ‘Panic Selling’ Your Stocks