The potential danger of a repeat of the 2008 financial crisis is obvious enough to most Americans, but investors are in an even more precarious situation as, being more intimately involved in the workings of the stock market than their fellow citizens, they are liable to be the first to feel the brunt of an economic crash. With that in mind, here are some tips to keep in mind as growing numbers of companies default on their debt:
“* Beware speculating on energy stocks. Brave investors have been trying to call a bottom in energy companies' profits for several quarters now. But the sector's pain continues as interest payments get all that more onerous given the massive drop in energy prices. Of the 46 global defaults this year, 13 are in the oil and gas sector, says Diane Vazza, head of global fixed income research at S&P Ratings Services. The surge in defaults is largely ‘fallout from multi-year lows in commodity prices,' she says. Energy profits keep falling. Energy sector profits are expected to drop another 107% in the first quarter of 2016 – even worse than the 55% drop in the first quarter of 2015, says S&P Global Market Intelligence.
* Cut losses. ‘It will come back' are famous last words for investors. When investing in individual stocks, especially some that could be even remotely flirting with default, it's best to cut losses short. Investors in coal producer Peabody Energy defaulted on March 18, leading to the company to file for bankruptcy protection in April. Don't think it's just a problem for investors holding the company's debt. Stock investors watched $1.3 billion in shareholder wealth burn up in just a year as the stock dropped from $73 a share to roughly $2 a share now. Had investors cut their losses at 10% of what they paid, they could have avoided this catastrophe.”