Even buy and hold investors have reason to adjust their portfolios while stocks are plunging.
Maybe you want to buy more of a good stock or fund that has declined in value, or you want to trim exposure to others. Whatever the motivation, buy and hold types who trade rarely may find it rough going in fast-falling markets. Here are a few things to keep in mind:
Your broker website may get clogged: Fast-falling markets prompt investors to look at their accounts as well as trade, and this can temporarily overwhelm broker websites. Brace for the possibility that you’ll have trouble logging in, getting web pages to load and completing trades. Market open and close are the busiest times, so try and avoid them where possible. Otherwise, accept that patience may be required.
Stop-loss orders may not work: A stop-loss order is used to sell a stock when it falls to a pre-set level. But in a fast-plunging market, stop-loss orders can either go awry or not work at all. A straight stop-loss order converts to a market order when your pre-set price is reached, which means you’ll receive the best price available at the moment. If stocks are in freefall, your actual sell price could be well below the stop price you set. You may be able to set a limit on your stop-loss order, which is basically a floor price. But in fast-falling markets, your stop-loss order may not be executed at the limit price you set. Net result - you still own the stock.
Falling account balances may cost you: Most online brokers have account fees that kick in when account balances fall below below threshold that range from $10,000 to $25,000. These fees are seemingly modest at $25 per quarter or $100 per year, but they’re still significant when charged on a small balance. On an account worth $10,000, $100 in fees drags returns down by 1 percentage point. Note: Many brokers offer ways to avoid these account fees -- by making regular monthly contributions to your account or a certain minimum number of trades, for example.
Selling obscure investments may be tricky: Liquidity may dry up for risky securities in a plunging market, which makes it tough to sell and get a decent price. The time to trim your exposure to risky securities is when markets are cruising, not crashing.
Cash is king: So says one of the greatest of all investing cliches for falling markets. If you’re holding cash for any length of time, use a high interest account mutual fund or exchange-traded fund. If you plan to trade in the near term, it makes sense to keep cash idling in your account.
Further reading: The Globe and Mail DIY investor’s guide to the best places for parking cash in an online broker account.