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Do you have an investing Plan B? How to shield yourself against devastating losses if markets crash By Myron Jobson For Thisismoney. Read this: Do you have an investing Plan B? This year established stock markets have continued to soar to new record highs or thereabouts – stretching valuations as they tick higher. But history teaches us that bull runs never last forever and eventually markets will plunge into a bear territory, or even worse face a full-on crash.
When exactly this will happen is anyone’s guess, so unless you have a fully functioning crystal ball, having a contingency plan is good practice. This Plan B is the thing that will support you when it feels as if the bad days just won’t stop coming. Here, we explore how you can shield your portfolio against devastating financial losses. What a contingency plan looks like Warren Buffett’s first rule of investing is not to lose money, although this is something that is particularly difficult to achieve. The second best tactic is to protect yourself as much as possible. Therefore, while investors continue to revel in the eight-year bull market – the second strongest in history – it’s important to have a plan B built in for if it all comes crashing down.
Stock market valuations in the US, in particular, are almost as high now as at any time in the last 300 years, according to Brian Dennehy, managing director of investment research firm Fund Expert. He adds that history suggests the downside from here could be more than 50 per cent. Your contingency plan can be the thing that you turn to when you are worried that markets are falling – such as an instruction not to panic and sell out when prices are low – but it is better to incorporate it into your actual investing strategy. We look at how to do that below.
They trigger the sale of a fund or stock once it falls below a predetermined level – so you essentially stop the loss from getting any bigger. Dennehy said: ‘Valuations are far from fine-tuning tools, and can be a very costly distraction. Many brokers allow you to set up a stop-loss order for a fee. So there is no guarantee that your stop-loss order will be executed, even if the share price reaches the stop price you have set. This is because share prices can change in seconds and if a share price has moved by the time your broker attempts to place your deal, it may not be executed at the price you have set, or at all.