Profit from A Crash – Be In Cash
How NOT being invested in the stock market can be profitable
Surely, if you leave your money on the sidelines and do not invest in stocks all the time how can you make a profit? Using the cash position to your advantage is a simple yet incredibly powerful strategy to make money from a downturn.
There are some very important questions you need to ask yourself.
- Are you always in the market? By this we mean are you always invested in stocks?
- Do you think you will maximize your profit if you are always invested?
- Are you scared of missing some profit if you do not stay in the trade?
The independent investors advantage – cash
One key advantage of being an independent investor is that you can pull your money out of stocks and move into cash whenever you want to and you do not have to answer to anyone but yourself. This is an important advantage over large institutions which have to leave the bulk of their cash invested in the market because of the manifesto they have with their investors. There are certain times where having your entire portfolio invested in stocks does not make sense.
Your default position should be cash – always.
From this position you buy stocks and hopefully reap the benefits. When things start looking bleak – sell. Today we have a lot of unknowns in the global economy. Are you going to stay in the market and hope for the best?
There is no shame in being in cash.
Most experienced investors trading their own account use this to their advantage. Knowing everything about Technical Analysis and Fundamental Analysis will not help you at all, if you refuse to move to cash when the market enters a serious bear phase. Money management and preservation of your capital is critical. If you risk too much and lose too much you will not have enough money to invest when the going gets good.
The more you lose in a downturn the more you have to make on the upturn just to break even.
An important stock market lesson
Example 1 -The Strategy of 80% of the people who fail to beat the market.
Stock A – you BUY 100 shares @ $10 per share = $1,000 investment
Stock A – Drops to $5 per share (50% loss) = your investment is worth now $500
Stock A – Moves back to $10 per share.
To get your investment back this stock will need to move back to $10 – this means you need to make a 100% profit – just to break even.
Example 2- The Strategy of the 20% of people who beat the market.
Stock A – Bought 100 shares @ $10 per share = $1,000 investment
Stock A – Drops to $8.50 per share = you SELL and take the loss of 15% – investment value now $850 – you stay in cash.
Stock A – Drops to $5 – you BUY 170 shares @ $5 – investing your $850 back into the stock – investment value $850
Stock A – Increases to $10 – you SELL 170 shares @ $10 = $1700. This is a 70% Profit.
Now you know what to do.
In example 1 you had the stress of being in a losing trade for a long time and making no profit at the end.
In example 2 you took your losses on the chin early. However, you then waited patiently for the right time to get back in and made up for your early loss and made a significant profit.
DO NOT SIT AND HOPE – TAKE ACTION TO PRESERVE YOUR CAPITAL AND WAIT FOR BETTER DAYS.