Wednesday, October 15, 2008

Bottoming of the Stock Market is Testing my Patience

Once again the stock market made another head fake. On Monday, the market closed with the largest one day gain ever, only to give back almost all of gains in the following two days. Unfortunately, it probably means that the market hasn't seen the bottom yet.

I've already have buyer's remorse from stock purchases I made before the final bailout bill vote. I don't want to make the same mistake again. Here's my plan on putting additional money back into the market.

  1. 50/50 approach. At this point, I'm not sure whether the market will rebound or go down further. Before putting significant amounts of money into stocks, I will wait for the market to either go up 50% ( Dow about 12,000) or go down 50% (Dow about 4000). If the market is up 50%, it will be clear that the stock market has rebounded. If the market is down 50%, there will be significant bargains available.

    The downside of this approach is missing out on a rally should one happen. However, since we have sold very little of existing holdings, a significant part of our savings would still participate in a market rally.

  2. Develop a new stock buy list. I will update my modified Unemotional Investor Growth stock purchase list and be ready for the buying opportunity when it occurs. I plan to publish the updated list next week.

  3. Sell out of the money puts instead of buying the stock. There are some stocks that I believe are already good deals, e.g. Monsanto, which is about $80. However, I realize that they may fall further. My plan is to sell puts that expire in one or two months at significant discount. In the case of Monsanto, I've sold the the November 60 put, which obligates me to buy the stock at 60 should the stock fall below 60.

    The main downside of this approach is the possibility of buying stock as the market continues to fall. To minimize the amount of stock purchase, I plan to keep the number of concurrent open put positions below five. That way, we will never have to purchase more than five different stocks should the market continue to decline.

This three step approach will make the continuing volatility in the stock market a little less frustrating. Based on the latest economic data, I wouldn't be surprised if the bottoming of the stock market lasted another three to five months.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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