2013 Markets around the world enjoyed great gains throughout the entire year. 2014 a month in, and American markets have pulled back. Dow Industrial down a cool 7% while the S&P is down 5% and tech heavy NASDAQ down 4%. Many investors believe that a pull back between 10%-15% is what is considered "healthy" for the market to stay true to its pricing. Analysts have been worrying and uneasy about the Fed's transition and tapering of its purchases of bonds. Others believe the sell off is because of how overpriced most stocks are compared to their earnings.
The worrying over the pullback is why many have been very speculative of the market and after such a great year being speculative is a natural reaction. Now the question being asked is how much of a pullback is considered healthy? And when does the real worrying kick in?
Look at your portfolio
Financials did not kick 2014 off with a bang. Usually January is a good month for investors, but this January was the opposite. Financials fell off of their highs like most of the market and could continue to fall with the Fed's tapering.
The most important move I made over the winter was setting aside some cash. A good 10% was how much I put down, and it wouldn't hurt to put a little more down either. Do not expect 2014 to be such as great of a year for equities as 2013 was. Its going to be choppier. I prepared by not only setting the 10% in cash, but also put a small percentage into hedge positions. TZA or Direxion Daily Small Cap Bear Shares, for example is one of many hedges investors can have on the market. The fund carries 3X the bear, or down side of the stocks it owns. And so in general, when the market goes down, these funds go up. They aren't bad ideas to own during pullbacks, but a few reminders. Trading hedge positions of any kind are typically a risky trade and experience should be required before setting aside any money into these funds. Only set aside a very small percentage into market hedges, and if you are hesitant or even questioning yourself, then the best hedge is to stay in cash. A lot of research must go into hedge positions before risking your investment.
Small Caps vs. Large Caps
Looking into small cap stocks tends to be riskier. They can be more volatile and depending on the stock, they can be unpredictable. Large caps you can expect more out of the stock. Compared to small caps, large cap stocks are like bread and butter. The big 30 on the Dow don't tend to flex up or down as volatile as low cap stocks do. A great dividend paying stock thats a big name tends to stay with the market obviously depending on the any big company news. In volatile market, small caps are riskier and should be treated with more care than trading a large cap stock.
In Conclusion
Choppy trading sessions should be something to expect more of this year and the market may not have the upswing like 2013 had, and so you won't get too lucky just picking a random stock these days, you have to realize whats going to fit your own goals. Using stock screening programs to fit certain criteria is a great start to picking out a few companies to invest in. I'd stray away from growth stocks this year unless they look absolutely promising. 3D Systems which has been on my watch board, got blitzed yesterday, the lesson to learn is not too panic and make decisions based on a great reasoning. Don't just sell just to sell, or don't buy just to buy. If you are in dire need for a growth stock the main stream profit maker Tesla is an intriguing one to look up. Don't be so scared when you see the market pull back like this. It's not the first time the market has pulled back a little bit, and it won't be the last.
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