My strategy in a downtrend is simple yet sometimes can be complex to adhere to. Use stop losses, maintain little risk, and hold significantly higher levels of cash than you are typically used to. If you do not have to make up significant losses when the market turns around, you can maintain profitability every year far easier. Active portfolio management that sticks to selling stocks when things get ugly versus holding and hoping it turns bullish again will perform better than a buy-and-hold investor every time unless the market is in a constant and almost never ending rally mode. Buy-and-hold only wins when the market can’t go down. You want to be heavily invested to the long-side when the market is in a bull mode and less active and very little invested to the long-side when the market is in a downtrend, like we see now. With the 200-day SMA around the corner, we could see some more volatile bounces. This creates favorable day trade opportunities, but holding much inventory overnight is not part of my style until the market gives me confidence that we will resume an uptrend.
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Yes, this can and will be boring. Use this time to do more homework on the economy and create a shopping list that you’d like to buy when things turn around. Other than that, take a little break from the market and pay no mind to bottom callers (who are right about 1 time out of every 100 calls they make) or forcing trades out of boredom or the thought that you will miss out. You will always miss out on something, expect it, don’t regret it. Plenty of opportunities everyday.
Stay disciplined.
Good luck out there,
Mike
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