Wednesday, October 08, 2008

Waiting for Capitulation

In 2007, I thought there was a high probability of the markets falling. However, I didn't think it would get as bad as it has been for the past couple weeks. If I had, I probably would have sold all my investments and stayed in cash :-)

The question now is when capitulation will happen. Once capitulation occurs, it's time to buy stocks in anticipation of a rebound. However, if often is hard to identify the occurrence of capitulation until sometime after the fact.

Last week I bet capitulation had happened and bought some shares Bank of America, J.P. Morgan, Wells Fargo and Monsanto last Friday before the passage of the bailout bill. I regretted doing so over the weekend, and regret it even more today. By close of market today, it was the fastest 23% I ever lost, meaning capitulation had not yet happened.

Based on the results of this week so far, it appears there's still more market decline to come before capitulation occurs. Unfortunately, this last stage is likely to very painful. At this point, I'm torn between beginning to exit the market and starting to buy some beaten down stocks before a turnaround.

Intellectually, I know it is important to stay invested and I'm trying hard to keep our longer term savings in the market. For now, I'm going to observe the market reaction for the next few days before making any investment changes.

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

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

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