3 Easy Tips for Surviving the Credit Crunch

Let's face facts. Not everyone is graceful under pressure. We'd all like to be James Bond - cool as a cucumber and ready for action, even when chained to a nuclear bomb that will go off in 30 seconds. However, we are all human, and we're going to get upset when we lose money.

The emotional roller coaster that is the bear market can make it exceedingly tough for investors to avoid losing both their money and their minds. So if you want to be a survivor rather than a victim, you'll want to read these three simple, but effective tips that will help you keep both your wallet and your mind in good shape for the long run.

1) Reduce Your Position Size

With less money at risk, you have a far greater chance at staying rational when the market is exceedingly volatile. In addition, very few stocks are holding any kind of sustainable rally, which makes holding cash a lot more sensible than holding stocks. So if your normal trade size is 5% of your account, take it down to 3%. This sacrifices some upside potential, but the trade-off is worth it.

2) Focus on Downside Risk, Not Upside Potential

When you consider a trade, ask yourself: how much am I willing to lose on this stock? That question should the first one you consider before hitting the buy button. By asking yourself how much you can lose, you are far less likely to make irrational trading/investment decisions.

3) Be Very Wary of "Cheap" Stocks

Do you want me to name you a cheap stock? How about a hundred? I can do that. Or maybe a thousand? No problemo. Always remember that cheap stocks can get cheaper, especially in a slowing economy and/or when earnings estimates are declining.

Take Garmin (GRMN), which is trading at $25, or 6 times expected full-year earnings.
Cheap, right? Yes, but it was also cheap a month ago at $35 and a year ago at $100.

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