perspective, if you had a respectable $50,000 invested, that’s $3,500 gone.
The question is… will it get worse? If it does, how can you be protected?
As a general rule of thumb, you should be bullish when others are bearish, but that’s a tired cliché. To be more specific, the market has been very bearish these few weeks. People are always looking for ways
to analyze market sentiment and one of my favorites is the CNN Fear & Greed Index. At the time of writing, this index has been zero. That’s extreme fear and the index can’t get lower than that. The
sell-off has begun.
To make matters worse, a lot of technical trigger points have been reached, such as breaching the 200-Day Moving Average, which is a psychological signal that makes even the most seasoned technical analyst anxious. A lot of computer trading is done based on the charts and moving averages, so once these points are reached, it’s not uncommon to see selling happen almost instantaneously.
A stock market correction is defined as a 10% decline in a relatively short period of time and has
historically occurred every few years. The last stock market correction occurred in 2011, so you could say that we are due for one. The Russell 2000 index for small-cap companies already corrected on October 1st, as it was down 10% from recent highs.
During the 20th century, the stock market has returned an average of 10.4% per year. An average! This means there have been better years and worse years. The 1950s gained 19% per year, while the 2000s gained 1%. If you invested at the peak of the market in 2000, it would’ve taken you seven years to get back to square one.
Do you have seven years to wait? If you converted to cash at the peak and invested at the bottom in 2002, you would've doubled your money in 5 years. I don’t expect anyone to be an expert on timing the markets, so here are two things you should consider.
1. Dollar-cost averaging. If you are investing a fixed dollar amount every month into an account,
you are dollar-cost averaging. Because more shares are purchased when prices are low and fewer shares when prices are high, the average cost per share of the security gets smaller and smaller. This lowers your risk of investing a large amount at the wrong time. However, the edge for dollar-cost averaging shrinks as the market rises.
2. Convert to cash and buy on the come-up. I am intrigued by Berkshire Hathaway, which currently has the most cash located in the U.S. of any corporation in the country. It seems like Mr. Buffett Is holding out for more great opportunities to present themselves – at bargain prices! As an investor, don’t get hypnotized by dollar signs. The most important thing is to make sure that you protect your assets. Remember that “bulls make money, bears make money, pigs get slaughtered”. Because it’s very unlikely that you will buy at the bottom of the market, simply wait until the market shows signs of recovery. If you convert to cash from higher prices, you’ll be able to get more per dollar when you purchase at lower prices.