Wednesday, May 20, 2009

Investing for the Next Bull Market

Rules for Investing in the Next Bull Market by Brett Arends of The Wall Street Journal offers some great tips for the inevitable next bull market. The list resonated with me. Based on my experience, here rules that I consider most useful to me:

  • #2 Avoid big moves. Essentially, only invest part of one's stake each time. While going "all in" can be rewarding when right, "all in" can be devastating when wrong.

    For example, during a market correction, I only invest part of the funds I have set aside in cash. Thus, if a stock or the stock market declines further, I can continue to buy at a lower price. On the other hand, when I think a stock or the stock market has advanced too far, I typically sell off part of the investment. Thus, if the stock keeps rising I continue to capture additional gains. If it falls, I have reduced my losses.

  • #6 Be truly diversified. Be broad thinking in this area. Diversify across different asset classes and strategies, not just across different equity classes and strategies.

    The recent bear market showed that there was no safety in any equity class. International, small cap, large cap and defensive stocks all fell significantly. Unfortunately, commodities and real estate also fell significantly. The only safe haven was cash, cash equivalents and bonds and for a short time, even some money market funds and bonds also declined in value.

  • #10 Be patient. Wait for a good opportunity to enter the market. If one has missed a market rally, look for the next correction to invest. Don't worry one will come.

    I consider the current rally a bear market rally. Therefore, I am selling some of our investments into the rally and waiting for a correction before reinvesting funds.

  • #11 Don't sit on the sidelines completely until it's too late. On the other hand, don't wait too long before investing some funds. Use #2 as a guide to start putting funds back into the market.

  • #12 Above all: Price Matters. While hard to practice, try to buy low and sell higher. If fundamentals are relatively the same, getting a company at a lower price is much better than buying it at a higher price.

    My father-in-law routinely calculates buy prices for stock in companies he likes. During market corrections, he will inevitably make several buys at prices he considers a good value.

  • Overall, I thought this was a good article. Of course, there is no guarantees that following these rules will make money. However, I believe these rules, especially the one's I highlighted, can help improve the chances of making money in the long run.

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

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

    Copyright © 2009 Achievement Catalyst, LLC

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