How To Avoid Huge Losses In The Next Stock Market Plunge
By Gail MarksJarvis, Chicago Tribune (TNS)
It was a brutal week that finished with a relatively happy ending for people paralyzed with fear about the stock market, but a disaster for some who tried to escape danger at any cost.
Despite a horrifying 1,100-point plunge at the start of the week, and more nail-biting downturns later, by the close on Friday the damage was not nearly as bad as you might have imagined. The Dow Jones Industrial Average finished the week about 1 percent higher than where it began the week, although the Dow remains down 6.6 percent for the year.
If you have a 401(k) you are probably looking at losses, but nothing like what they were when the Dow was down 11 percent early last week.
People who were hit hard by the downturn tried to run for the exits while the stock market was plunging. Even those who tried to pick a moment when the downturn wasn’t too bad got hurt. For example, Monday for a short time the Dow seemed to be recovering. After being down 1,100 points stocks began to climb, and at a point when the Dow was down only about 150 points, people might have assumed they would bail out and escape any future danger. But it didn’t work that way, and never does if you are trying to get out of mutual funds in a plunge.
People with mutual funds often don’t realize that when they get cold feet about 401(k)s or any other investments, they can’t just get out of their funds on a moment’s notice. Instead, you have to wait until the end of the day even if you notify the fund hours earlier to get you out. So last Monday, a person might have decided to bail when stocks were down just 150 points around noon, but the loss they had to take was more like 600 points because that was the carnage in stock funds by the end of the day.
To make matters worse, since nervous people sold their funds at the worst of times, they didn’t get the benefit of the recovery that came late in the week.
It wasn’t only mutual fund investors who took a hit in the rush to the exits.
Sometimes people buy exchanged traded funds so they can sell their funds on a moment’s notice during scary moments. But last week was an extremely scary period, and individuals in ETFs got hurt too.
People yanked $29.5 billion out of stock funds during the week through Thursday, the largest move on record since 2002, according to analyst Michael Hartnett of Bank of America Merrill Lynch. As they sought safety they dumped $22 billion into money market funds, the largest amount since December 2013.
So many people were trying to flee all at once that it didn’t matter when they contacted their brokers and said “sell” now. The value of the funds fell precipitously before the selling actually could be completed, so people ended up losing far more money than they expected.
This happened in solid stocks too, like General Electric. Usually it’s a mild-mannered stock with relatively calm ups and downs. But in the midst of wild selling Monday it fell about 20 percent. It hit a low of $19.37 before climbing to $25.16 by the end of the week.
It was tough to find enough buyers for stocks and ETFs when so many wanted to sell all at once. So many people were going onto sites like Schwab and TD Ameritrade to sell, there were technical troubles. Details will be examined in the weeks ahead, but the lessons for individuals are simple.
If you think you are going to escape from danger in stocks when it hits, there’s probably little chance. Last week people panicked over a slowdown in China, but China’s problems have been brewing for a long time.
Analysts are not sure what to expect for the weeks ahead, and say that more worries about China and the Federal Reserve raising interest rates could cause more downturns. But they can’t be sure. If you were panicked last week, shave away some stock exposure — not all — during an upturn.
Also, if you invest in stocks or exchange traded funds, never make the mistake that too many people made last week. They simply told their brokers to “sell” with what are known as market orders. When brokers get such orders they sell your stocks or ETFs whenever they are able. That means you might decide when you’ve lost 5 percent to sell, but maybe end up losing 10 or 20 percent by the time your order actually is concluded.
To protect yourself, always sell with a “limit order.” With such an order you tell your broker what price you want to use when selling. That keeps you from selling at an unknown price along with the panicky mobs.
Photo: A pedestrian looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, August 27, 2015. REUTERS/Yuya Shino