How to Plan Instead of Panic
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By Keith Kaplan, CEO, TradeSmith
The stock market cast its vote weeks before you did.
Democrats took both the House and the Senate by historic margins. That sets up two years of gridlock in Washington… and a lot of open questions about taxes, tariffs, and, most important, AI regulation.
We saw earthquake-like volatility in the stock market last week. The S&P 500 lost about $2.9 trillion in market capitalization, its largest one-day loss of market value on record. And tech stocks had their worst day since 2020.
But the selling pressure built up well before the ballot boxes opened on November 3.
On Monday, the tech-heavy Nasdaq 100 slipped into a correction, closing more than 10% below its Oct. 6 high. (That’s Wall Street’s term for a drop of 10% or more from a recent peak.) And the AI stocks that had been leading the market higher fared worse.
Last Thursday, Google parent Alphabet (GOOGL) had its worst day since going public in 2004, falling nearly 13%. The following day, Intel (INTC) lost 29% in a single session, its biggest drop since the 1970s. And the Philadelphia Semiconductor Index (SOX), which tracks the 30 largest chipmakers, is now down nearly 22% from its October high.
Part of that is the market losing patience with AI spending. But part of it is politics.
More than 99% of political ad spending on data centers this cycle went to ads opposing them, from candidates of both parties. And more than half of voters told the NBC exit poll that AI and data centers were a crucial or major factor in their vote.
[Managing Editor’s Note: Keith shared a full breakdown of the recent rout, the primary risks ahead, and why he’s still broadly bullish on his X account. Check it out here, and be sure to follow him for more.]
If you own the popular AI trades, your portfolio has been hurting. And at times like this, it’s natural to question yourself.
Will the AI trade bounce? Is gridlock good for stocks, the way it’s often been in the past? Will red tape stall the data-center buildout?
I don’t know the answers to these questions… and the truth is, neither does anyone else.
As I’ll show you today, they’re not even the questions you should be asking.
The folks who come through stretches like this in good shape and retire comfortably don’t waste their time on predictions. They focus relentlessly on following a solid plan.
Today, I’ll show you the three questions I ask before buying anything. They’re simple enough to write on an index card, and I’ve used them for years to decide how much to put into a stock, where it fits with everything else I own, and when to get out.
Get them right, and no single bad week... not this one, not the next one... can do lasting damage to your retirement. That’s not a prediction. It’s arithmetic, and I’ll show you how it works.
First, let me say something that’s not much fun to hear.
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An Uncomfortable Truth
If the sell-off hurt you more than it should have, the problem probably wasn’t your stock picks. It was that you never decided in advance what you’d do once you’d bought them.
That’s the uncomfortable truth about investing. Being right about a company isn’t enough. You also need a long-term plan.
It doesn’t have to be complicated. In fact, the simpler it is, the more likely you are to follow it when the market is falling and your stomach is in knots. Mine answers three questions before I buy anything:
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How much of my money goes into this?
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Where does this fit alongside everything else I own?
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At what point will I admit I was wrong and sell?
That’s it. No forecasts, and no view on what Congress does next.
Let’s take them one at a time, starting with the one that cost me the most to learn.
Question No. 1: How Much of My Money Goes Into This?
Most people buy stocks the way I used to.
One of the most painful examples happened in 2016. I read an article about an up-and-coming chipmaker called Advanced Micro Devices. It was about to take a real run at Intel, and the stock was trading under $10 a share. I decided I had to own it, and I bought it that day.
AMD drifted sideways for a while, then dipped. Nothing dramatic, but enough to make me nervous. I’d put in more than I was comfortable losing, and every red day felt like a warning. So I sold, and took a loss of about 3.5%.
AMD went on to rise more than 1,500% over the next eight years.
I was right about the company and wrong about everything else. I’d never decided how much I could afford to lose, so I had no way of knowing whether that dip was normal or a reason to worry. My emotions made the decision for me.
So I stopped asking “which stock?” and started asking “how much, and what’s my exit?” before I put a dollar in. The answers had to be set in advance when I was calm so I didn’t have to trust my judgment in the moment.
That one change did more for my returns than any stock recommendation ever has.
The rule I’d start with is this: Never put more than 2% of your portfolio at risk on a single idea. That’s the money you’d actually lose if the trade went against you and you sold, not the total you invest.
That takes the drama out of a day like last Friday. If Intel was a 2% risk for you, its 29% drop cost you something close to that, and your rule took you out. If it was a 25% position, you’re now making decisions out of fear, which is exactly when investors make their worst choices.
Question No. 2: Where Does This Fit Alongside Everything Else?
Position sizing protects you from one bad stock. It doesn’t protect you from owning 10 stocks that all go down together.
That’s what caught a lot of people in October. They thought they were diversified because they held Nvidia, Alphabet, Meta, Intel, and a few chipmakers. But they all were betting that AI spending would keep paying off. When the market started asking whether it would, every one of those stocks fell at once.
So the second question is where a stock fits. I don’t mean what sector it’s in. I mean what job it does for you. I think of my own money in three buckets.
The first is money I intend to hold for a long time in big, established businesses that make money in good years and bad. This is the part of my portfolio that doesn’t need much watching.
The second is money for ideas that are working now. These are stocks I’ll hold as long as the trend is healthy, and sell when it breaks.
The third is money for speculation. The AI darlings, the small biotechs, the themes everyone’s excited about. This is where the big wins and the big losses both live, so I keep it small.
For me, that’s about 5% of my total stock holdings. Yours might be more or less. The point is to decide the number in advance and not let a hot streak quietly turn 5% into 25%.
Question No. 3: At What Point Will I Admit I Was Wrong and Sell?
This is the question most investors never answer, and it’s the one that costs them the most.
Everyone has a plan for what to do if a stock goes up. Almost nobody has one for what to do if it goes down. So when it does, they improvise. They tell themselves it’ll come back, or they buy more at the lower price to “average down.” Eventually they stop looking at the account, and one day they open it to find a 15% loss has become a 50% one.
The fix is to decide your exit before you buy, and write it down.
The simplest version is a trailing stop. You pick a percentage, say 20%, and you sell if the stock falls that far from its highest point since you bought it. If it rises, the exit rises with it. If it falls, you’re out at a loss you chose when you were thinking clearly.
I won’t pretend this is foolproof. When Intel fell 29% in a single session, no stop at 20% got anyone out at 20%. A stock that gaps down overnight blows through the exit you set. That’s why the first two questions exist. If Intel was 2% of your risk in your speculative bucket, a bad gap stung. If it was a quarter of your savings, it did real damage.
No single part of the plan saves you on its own. Together, they make sure that when you’re wrong, and you will be, it costs you something you can afford.
TradeSmith Is Here to Help
We built a lot of the TradeSmith platform to answer these three questions.
TradeStops tracks your trailing stops so you don’t have to. Our Position Size Calculator tells you how many shares to buy for the amount you’re willing to risk. And the Risk Rebalancer tells you when one part of your portfolio has grown out of proportion to the rest.
But software only helps if you’ve got a plan for it to follow. A notebook and a calculator will do the job too, and you’ll still be ahead of most investors, because most people never make these decisions at all. They buy what sounds good and hope for the best.
The one thing you can’t do is skip the plan and rely on your crystal ball instead. It’s as murky as everyone else’s.
So if you don’t have a plan yet, this week is a good time to write one. You’ll never know what the market does next. But at least you’ll know what to do about it.
All the best,
Keith Kaplan
CEO, TradeSmith |
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