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Your Investment To-Do List

handwritten to do concept list on notebook with pen with in red ink 1] make 2] more 3] money

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By    |   Friday, 19 October 2018 10:32 AM

It’s been a tough few weeks for the markets.

But if you’ve looked at market history, that should come as no surprise.

Many big market drops—surprising or not—happen in October. There’s 1929’s massive drop. Or the one-day 22 percent decline in 1987. And most folks still remember the harrowing days of October 2008.

But in all three situations, the market recovered and moved higher. In the case of 1987, the market closed up at the end of the year. The 2008 market wouldn’t hit new highs for a few years. The 1929 drop, fueled by massive speculation, took far longer to recover. But it did.

That perspective is important. But when you’re in the thick of a market selloff, that knowledge that things will work out in the future seems more academic than pertinent. After all, markets fall faster than they rise. Seeing months or even years of gains built up getting monkey-hammered in a matter of days is a challenge.

That’s why investors should be doing a few things to protect and grow their wealth, even during the inevitable and periodic pullback.

First, investors should consider their cash holdings. I get it, cash is boring. But after a few years, the Federal Reserve has now raised interest rates to 2 percent. While that’s not exciting, it does mean that more bank accounts are paying interest than before.

If you want to set aside cash, at least now it can earn something. We’re far from the heyday of the mid-2000s when extra cash in a bank account could earn 4-5 percent on cash in the bank. At those rates, you could earn up to half the stock market’s average annual return with none of the risk of investing in stocks!

Besides holding cash in an interest bearing account, even if you need to create one or move you money into a bank to do so, there are other ways investors can take advantage of today’s markets.

The next best thing investors can do is sell covered calls on their holdings, particularly after those holdings have a big rally upwards. Doing so means you’re willing to book profits at the call option strike price, and thus lock in a profit.

But if you go slightly out-of-the-money after a big rally in shares, chances are you can end up keeping them. Whatever causes a stock to rally in the short run typically only lasts for a few weeks or months. By selling a call option a few months out, you’re betting that the recent rally will peter out, and shares will get comfortable in a new and higher trading range.

In that way, you can generate more cash from your holdings. Depending on your initial entry price, doing so can easily provide a position with an extra 8-10 percent per year—possibly more if you want to get particularly aggressive. To me, however, covered calls provide the opportunity to simply ensure that existing positions offer the best returns for their money.

The third and final thing to do in a choppy market environment is the most important. Rather than think defensively, it’s about thinking offensively and preparing for brighter days ahead. This final to-do item is to create a watch list of companies you want to own for the long haul, and a price you’re willing to start buying them at.

In a market panic, that’s a tall order. When stocks are falling, stepping in to buy shares can seem crazy. But that’s just short-term thinking at work, not long-term potential.

When it comes to setting up a watch list, it’s also a good idea to look at your existing holdings. Many of them will become better buys in a market selloff—and adding to shares you already own allows you to lower your cost basis and make it easier to get back to profitability following a market selloff.

In short, if choppy markets are concerning, raise some cash. Enough to sleep well at night and allay any fears you might have. You can sell of some positions to do so, or employ cash-generating strategies like covered call writing. But the most important thing you can do, even when markets look ugly, is search for new opportunities out there.

It’s a simple-sounding list. Just remember to stick to it, even when fear is running rampant and your emotions suggest a course of action bigger on raising cash—you may not like it in the short-term, but your future wealth is at stake.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2021 Newsmax Finance. All rights reserved.

Just remember to stick to it, even when fear is running rampant and your emotions suggest a course of action bigger on raising cash—you may not like it in the short-term, but your future wealth is at stake.
investors, do, list, protect, wealth
Friday, 19 October 2018 10:32 AM
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