Today I want to talk about something that's on a lot of people's minds at the moment – a concern I've heard from a lot of readers lately…
That is the prospect of a market crash in the weeks ahead.
Now, a crash is possible. The reasons why range from COVID-19 (the novel coronavirus) to the upcoming presidential election to another terrorist attack.
However, it's important to remember that nobody knows for certain what's going to happen. So do not let these – or any – uncertainties throw you off your long-term investing plan or cloud your thinking. Remember that making investing decisions based on emotion can lead to big losses.
What's best to ask is whether a market crash is probable. This allows you to prepare ahead of time for the unknown, which makes all the difference.
Take the coronavirus. Many analysts are calling it a black swan event, meaning it's unpredictable. But at this point, I think it's more like a "gray swan" – we know this thing is coming.
But the markets do not reflect this possibility. Even with Tuesday's market drop, major indexes are flirting with all-time highs. The melt-up that I told you was likely last fall seems unstoppable.
Well, I don't particularly like surprises. And this all leads to me to think there's another shoe out there getting ready to drop. Some folks may or may not share that opinion, but what we do share is the desire to future-proof our portfolios and our wealth.
So here are the steps to take to ensure both are protected…
The Markets May Be Uncertain, but You Don't Have to Be
There are three steps to take to "future-proof" your portfolio so you're prepared for whatever comes next.
The first thing you need to do is to make a short list of companies that you'd sell and those you'd keep if there's a sudden downdraft.
Mind you, this doesn't have to be complicated.
The easiest way to do this is to simply ask yourself which companies have the strongest performance and the clearest path to profits.
The answers will become self-evident pretty quickly when you line them up with my Six Unstoppable Trends and whether or not the companies that interest you make "must have" products or merely the "nice to have" variety.
Using this same logic, Apple Inc (NASDAQ:AAPL) is a keeper at any price. Uber Technologies (NYSE:UBER is one to toss.
The second step to take is to bring your trailing stops up nice and tight – probably even tighter than you're used to.
As a quick reminder, a trailing stop is an advanced options order that automatically tracks the prices of your options positions and then sells them automatically when their value declines by a predetermined amount from the highest price achieved.
If, for example, you identify a company you want to "throw" away and you're running at a 25% trailing stop as a rule of thumb, consider bringing that up to just 5% or even tighter to get out early if and when there's a rollover.
There may not be, so this strategy gives you the freedom to ride along to more profits. That's a win-win.
And finally, the third step to take is to get ready to buy.
Now, I know that catches a lot of people by surprise, but you really do want to play offense when things go south.
As I've mentioned before, when there's blood in the streets, buying is the single most powerful move you can make – even if you're scared to make it. While it may come across as counterintuitive, non-obvious advice, history shows that it's very, very valuable.
In fact, the late Sir John Templeton – arguably the greatest global stock picker of the century – had a term for what I'm talking about. He called it "buying at points of maximum pessimism."
With that in mind right now, I'm particularly focused on companies that do not have a lot of coronavirus exposure and which may be even stronger when the virus really takes hold. It's a pretty short list of firms, as you might imagine.