A month ago I bet you didn’t think the end of the world would be upon us? I bet you didn’t think a new mega-virus would sweep across the world leaving chaos in its wake?
That’s the crazy thing about the world we live in…always expect the unexpected.
There’s another uncertain event taking place today. Not in Australia, but over my current neck of the woods. Here in the UK.
Today is Brexit Day!
As an Australian, I’m still perplexed by the hoo-ha about it all. Surely you’d think being an independent sovereign nation again is a good thing for the UK? Right?
Aussies love the fact that Australia is governed by us. WE love the idea of ‘Aussie Made’. We love our patriotic passion for all things competitive sport.
But in the UK so many still want to be tied to the teat of the EU. Albeit, it’s a very dry teat. If anything cutting off the decrepit EU might just break free of the shackles the UK has desperately needed over the last decade.
Still, with the official Brexit Day being today…who knows what comes tomorrow.
Prepare for the good and the bad
That’s the kicker to all this. We don’t really know what comes tomorrow.
I think Brexit will end up as a good thing. Many others don’t.
I also think by the end of the February most people will have forgot about coronavirus. Many others don’t.
Will it all get worse, or will things look up as I anticipate?
Again, no one knows for sure. And this is the beauty of the world we live in. You get to decide what you believe and who you believe in. You get to make your own decisions on the information you have access to.
That’s what makes our world great, the ability to decide on things for yourself.
About the only thing we can be 100% certain of is that in 4.5–5.5 billion years, the sun will enter a red giant phase ending all life on Earth as we know it.
With that some way off, you really need to know how to properly manage uncertainty here and now.
As an investor in particular, you need to know the tools and tricks available to do this. Enter the investment game without knowing the game properly and you’re destined to lose.
And where possible, you should do what you can to try and prepare for the good and the bad.
Easier said than done.
But some basic, shrewd financial actions can give you a little more ‘sleep at night’ factor. And may even do a thing or two for your own mental wellbeing.
For example, you should have a bit of cash ready on the side at all times. Just in case things turn tough. Like here in the UK, maybe Brexit causes the economy to break down — in that case you’d want some cash savings in case work dries up.
In general, it is a sound piece of advice, I reckon most people should have at least 6–12 months of the mortgage payments tucked into savings. And then a buffer to cover day-to-day running costs.
But aside from boring (but maybe lifesaving) savings, you should manage your investments with the thought of all outcomes in your mind.
For example, if you’re getting into the market you need to know about buying and selling stocks. You need to know the difference between a market order and a limit order.
If you’re getting into small-cap stocks in particular, you’ll need to also be aware of your risk tolerances. And then beyond that you should be familiar with conditional orders.
Using conditional orders in the market
You might know about these already, but many people don’t. And if you don’t know about them or use them, you might be missing a trick.
For example, there are these great little conditional orders we call stop-loss orders.
If you’ve invested into a stock and it starts to fall in value, a stop-loss order can save you. It’s an automatic execution order you put in the market that will sell you out of a position. It does this based on a predetermined loss trigger you set.
For example, you invest in Stock A at $1. You then set a 20% stop-loss order. If Stock A falls to $0.80, the sell order will be placed in the market to exit the position.
That means if the stock continues to fall further, you limit the downside to the investment. But if your stop-loss triggers and the stock recovers and heads higher, you will no longer be invested in the stock.
This is the risk of a stop-loss order.
You should always make sure if you decide to use stop-losses they are suitable to your strategy and plans.
Of course if a stock flies higher, you can then also use what’s known as a trailing sell order as well.
With these if a stock is rising you can progressively ‘lock in’ profits.
For example, you might invest in Stock B at $1 and it’s price shoots up 100% to $2. In this case, you might decide to set a 20% trailing sell order as the stock climbs upwards from $1.
What happens then is that if the stock then falls 20% from its new high of £2 — i.e. it falls to $1.60 then your trailing sell order is placed in the market and you exit the position.
That means you’d have locked in a 60% gain from your initial investment. If the stock went higher from $1–$4 and you had a trailing sell it would only trigger in the event of a 20% fall along the way. If it made it all the way to $4 and then fell 20% to $3.20, you’d have ‘locked in’ the gain of $2.20, 220%.
Trailing sells are great to protect rises from the original investment.
But if a stock is volatile on the way up they can also exit you from a position that perhaps you don’t want to exit from. That’s why, again, you need to know about them, how to use them and if they fit with your strategy in your portfolio.
These are two of the more basic conditional orders you can use while investing to help protect yourself a little. They’re a staple of small-cap investing.
So, get to know them, get used to them. And if they fit your plans, put them into play.
It’s a smart way to manage your portfolio. In a world where the only certainty is uncertainty — and that stuff about the sun — these are a great way to take emotion out of the investment process.
Editor, Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.