Section Items
Short Term Holding
Slightly Off Topic
Misc.

Share Dealing - The Next Big Drop

Looking at the history of stock markets one thing is very clear; there is going to be a big drop in share prices sometime in the future.

What is unclear is how big the drop will be and how long prices will remain depressed.

Details

As we know that there is going to be a big drop and that we can not predict when it will occur, we should plan for it.

The most important thing is to have enough money available to sit out the drop, although the strategy is quite clear that long term holding is wrong this seems contradictory. It isn't really because the mega drops come fast and are not fundamentally related to the value of the business, if you happen to be holding shares in the sector that triggers the drop then you are in trouble.

However, if you have been trading using this strategy it is unlikely that you would have been in the troublesome sector. Take the 2008 crash, the banking shares that brought pretty much everyone else's prices down were at their peaks and rising, suddenly there was so much bad news coming out about the banking sector that when prices started to nose dive they were all clear "falling knives".

Of course not being in banks wouldn't have helped you, your shares would still be down to 20% of what they were worth, so you need to be able to wait this out.

It's like buying a house or a car, it could get destroyed by fire the day after you bought it, to cover this eventuality most people buy insurance. I am not aware of an insurance policy for trading losses so you need to self insure.

Self insurance has two elements.

One element is working out how much you can afford to invest and putting part of that into a savings account and the other part into you investment pot. It may very well be in the early days that you have so little invested that the benefits of a larger uninsured pot, greater absolute growth out way the safety of having insurance.

The other element is taking your profit and doing the same thing, some goes into somewhere safe and some goes back into the pot.

It is of course possible that a big drop could be permanent, my suspicion is that this is very unlikely for the simple reason that every one needs to plan for their pension. This means that there is always new money available to institutional investors and overall this organisations can weather the sort of trading conditions that wipe out the private individual.