Stock Trading: How to Make 50% in a Correction with Little or No Risk
Businesses make money in one of two ways: by growing sales or by cutting expenses. Individuals cannot always increase their income when they want to, but they can cut their expenses. It's not what you make, it's what you keep. Or, as Ben Franklin put it: "A penny saved is a penny earned."
If you lose money, you have to make it back just to break even. Suppose you have a $100,000 stock portfolio. If you stay fully invested in a correction, it can shrink to, say, $70,000. Although "long term, stocks go up," there is no assurance that you will ever make this money back, or that you won't lose even more trying.
A $30,000 loss on a $100,000 portfolio is 30% ($30,000 ÷ $100,000) - nothing to sneeze at. But to make it back, you will need to make 43% ($30,000 ÷ $70,000). That's hard to do even in the best of markets. So NOT losing the $30,000 is the equivalent of generating a 43% return in our example! And you don't have to do anything - just sit in cash!
Let's also suppose that when the correction is over, you move back into a conservative stock fund and get 10% on your $100,000 investment. That's $10,000 on top of the $30,000 that you just saved - the equivalent of a 57% return if you had to start with $70,000!
Let's say your timing is not perfect: you get out with a small loss, you get back in too early or with a slight delay. Still, if you factor in the 1%, or so, on your idle cash, your total return can approach 50%. Opportunities like that do not present themselves that often. All you have to do is use some common sense, discipline, and self-restraint - not a bad way to make 50% in a correction when everyone around you is losing money.
Now, the market may or may not correct 30%. But even if it only drops 10%, you will still have saved $10,000 in our example. I don't know about you, but I can always use an extra $10,000.
Published by Slav Fedorov
Full-time stock trader and founder and managing member of TradingZoom, LLC, a provider of timely stock picks to part-time traders. Former banker, stockbroker, financial planner, with over 20 years market ex... View profile
- English as Second Language (ESL) Learners in Saudi ArabiaA case study of ESL learners in Saudi Arabia.
- Defensive Stocks to Avoid Political Risk and a Double Dip RecessionThe Obama administration is pursuing what some think is an anti business agenda. Some even fear a double dip recession. Where could you invest to mitigate these dangers?
- Evaluating a Wide Variety of StocksIt's a good idea to take a look at the various stocks that you purchase that will help you achieve your goals and objectives.
- Cyclical and Non-Cyclical Stocks - What is the Difference?There are different kinds of stocks available for the purpose of investing but in this piece of writing, we will only target cyclical and non-cyclical stocks.
- Administrative Reforms in Indian ContextAdministration by the Government is the effective and efficient implementation of its policies by its officers or authorized agents to reach the intended mass.
- Free Investment Advice on Portfolio Rebalancing
- Low Scores and Poor Advertising Potential: Why Soccer Won't Make it in the U.S.
- Bear Market Moves: Look for the Defensive Stocks to Insulate Your Portfolio
- Real Estate in 2009: Think Before You Buy
- How to Buy HUD Foreclosures in the Memphis Area
- Twenty-One Ideas to Make Things Easier for when You Must Say No to Your TEEN
- 7 Deadly Mistakes Investors Make Buying Mutual Funds for Their Retirement
- In stock trading, you can improve your returns by simply losing the least amount.
- Ben Franklin: "A penny saved is a penny earned."
- It's not what you make, it's what you keep that counts.