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The smart investor's guide to surviving the stock market roller coaster ride

by , 26 May 2015

Since the slump following the financial crisis, shares on the Johannesburg Stock Exchange have continued their overall upward trend.

But investing in the stock market is risky. There's always a chance the stock market could take a turn for the worse.

So what's the best way to prepare?

Read on to find out…

The battle between the stock market bulls and bears

There will always be investors who’re very bullish about the stock market and there will always be investors who’re very bearish about the stock market.

Unfortunately, without a crystal ball, no-one really knows what lies ahead. Listen to both sides and you’ll no doubt agree with some of the arguments put forward…

The bears may cite:

  • Poor economic growth here and overseas;
  • High valuations of many shares; and
  • An upward run that’s been going on too long.

The bulls may cite:

  • That sluggish economic growth isn’t bad for stocks, the most important thing is growth;
  • Slower growth keeps interest rates lower, which is good for companies to borrow and consumers to spend; and
  • Shares are attractive investments when interest rates are low.

But the fact is, no-one knows. And market timing is for mugs.

The stock market prices in probable future events. If news surprises, the stock market can jump higher or lower in response.

How to survive the fight between the stock market bulls and bears

So where does this leave you?

You could think about selling your stocks, just in case. Or you can continue investing.

The smart investor doesn’t run from risk, Alexander Green in Investment U explains. In fact, the smart investor embraces it, manages it and hedges it.

There are a number of things you can do to manage the risks of investing. And these investment strategies will help you if the market falls or continues to rise.

There are four key things you can do to help your portfolio out:

  1. Asset allocation: Ensure you invest over different asset classes.
  2. Diversification: Ensure you diversify within the different asset classes you invest in.
  3. Position sizing: Only put a small portion of your investment capital into each investment.
  4. Trailing stop losses: Run trailing stop losses on all your investments and stick to them.

So there you have it. The smart investor’s guide to surviving the stock market roller coaster ride.

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The smart investor's guide to surviving the stock market roller coaster ride
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