Step 2: Rotate to Safety
For income and growth investors with that need to keep a flow of income coming in, stick with and rotate to the safest sectors. While they too will be subject to selling when the algorithm program selling kicks in, the damage inflicted will be far less than with the momentum and high-volatility stocks. The best sectors to rotate to include consumer staples, utilities and real estate.
Step 3: Sell the Memes
By all means, sell any of the meme stocks that could be in the trading section of your portfolio. These companies are supported by the WallStreetBets retail investors that will run for the hills in a sharp sell-off. Many of them have very limited capital, and many likely are trading on margin. In fact, the average Robinhood account only has $6,000 in assets, so they cannot afford a prolonged and deep sell-off. Stocks like GameStop, AMC Entertainment and even Chinese internet giant Alibaba could be eviscerated in a large correction.
Step 4: Hedge
Consider adding a market hedge to your portfolio. One of the most widely used across Wall Street is of course gold. SPDR Gold Shares (NYSEARCA: GLD) is a good way to actually own physical gold without having to keep it in your safe at home. Plus you can buy or sell any day that the market is trading the shares. Investors also can buy the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) to own the top miners in the sector, many of which also mine for silver as well.
Step 5: Go to Cash or ETFs
When anxiety gets to the highest point, you can always sell and go to cash, but there are a host of negatives with this tactic. It would be a great idea if money markets paid anything, but the highest yielding money market savings account pays a lousy 0.40%. Banks literally pay almost zero for funds held in checking accounts. One solid idea for those with a touch of risk appetite is to buy a non-leveraged investment-grade exchange-traded fund like the Invesco Bond Fund (NYSE: VBF). The portfolio is focused on the debt from top companies like AT&T and Corning, while also holding government Treasury debt and other more secure debt securities.
The bottom line, like Emanuel alluded to, is that it is not a question of if but when a sizable correction will come, and those with any sense of stock market history are well aware that’s very likely the case. That being said, veteran investors also know that, over time, the best long-term investment strategy is buying stocks of quality companies, especially those that pay dependable dividends.