We have witnessed a remarkable stock market comeback in 2019. It comes as a huge relief, but don’t forget that market sell offs can happen at any time – and they usually happen fast. Even when we’re enjoying some nice bull action, you must remain alert. If you become complacent, you risk losing money.
We often look for a reason for market sell offs. There are a million of them. Reasons include a tight monetary policy, tariffs, a slowdown in earnings, the latest breaking report on the news or even the length of the current expansion. Any excuse is a good one, even while we experience a double-digit run up.
Only one reason matters though: The acceptance that markets will go down, and they will go down when you’re likely not prepared for the move.
Market sell offs happen
Think back to December, when volatility rose sharply. And don’t forget January and February 2018, when the Dow Industrials plunged lower and volatility skyrocketed higher. A lot of people were caught off-guard.
I look around at my fellow traders, and I am afraid that many of them are not prepared for adverse market conditions. Currently, the market is very complacent, and the bulls are emboldened. With the volatility index around 13%, it is clear that no one believes the markets will go down. I’m also pretty sure that nobody is buying insurance.
So, the question is: how can you prepare for market sell offs?
Play defense by protecting your portfolio. You need to be ready for the next move down, so you don’t panic and lose precious capital. Protection via puts is super cheap right now. It may not pay off in a big win, but it will certainly take the sting out any market sell offs. The market will go down at some point. Are you prepared for that moment?