There are two things one can do when going on vacation: stay invested or go into cash. Going away while on margin is out of the question. Fully invested, you have a good chance of ruining your vacation by worrying too much about the positions. But if you go into cash, greed takes over: what if you miss a nascent rally?
I find that a reasonable compromise works best for me: small positions in the best stocks with logical stops.
Of course, these days a laptop and a hot spot is all you need to stay in touch with the market. But the whole point of a vacation is to get away from it all to clear your mind, or is it? Besides, Internet access on a cruise ship is prohibitively expensive, and the exotic itineraries that we prefer make for rather odd trading hours. The bottom line: I prefer to "vacation proof" the portfolio before going and just leave it alone. I suspect that the leaving it alone part does the trick.
1) Since I can't correct mistakes while away, I focus on the best stocks and eliminate so-so trades.
2) If my stops are too tight, I may get shaken out, only to miss the advance. So I use logical stops. If a stock violates them, it indicates a change of direction. No need to rush back in - chances are, the stock will need time to build a base before advancing. Since my logic may be flawed, I ladder the stops.
3) Logical stops on small caps must allow for wide swings - typically more than the 5-7% advocated by most trading systems. To compensate for a larger potential loss, I adjust the position size. If a stop is triggered, the dollar loss is relatively small, but if the stock takes off, it can still produce sizable gains. In the end, it's a handful of stocks that make you the real money. The rest either languish or wilt. Stops simply help with the weeding.
4) If I am afraid of missing out on a good breakout, I use buy stops.
5) There is always a chance that a major disaster like a terrorist attack will hit while I am away. If this happens, the markets are going to gap down no matter where I am, so being at home won't be of much help. An SDS/QID hedge equal to 10-15% of the long position seems adequate.
6) I cut out all background noise in the form of daily market updates and opinions. I don't watch CNBC anyway but even the seemingly ubiquitous CNN these days can do enough damage by dramatizing its own agenda to the point of depression. My take away from this April (from being inadvertently subjected to the headlines in airports, bars, and the stateroom): the looming world "food crisis." So I just tune out.
When I return, it takes me less than a day to get back up to speed. I don't have to read the back issues of IBD to know what the market was worrying about a week ago. Stock charts tell me all I need to know about the health of the market and current trends.
What I do avoid by being away from the computer is the constant worrying and overtrading while responding to the market's minor mood swings. So there you have it: buy small positions in the best stocks, use logical stops and hedging to protect the downside, and DON'T SWEAT THE SMALL STUFF. The market will do the job for you. Vacation proof your portfolio.
