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As of the market close this past Wednesday, the Dow Jones Industrial Average had crossed over from what is termed a “correction” and into “bear market territory,” space that is reserved for market losses in excess of twenty-percent. These days, when the media wants you to stay tuned to every tick of a stock price, it pays to take a moment to become reacquainted with some sound investment principles. It pays to review your long term invest objectives and determine whether your portfolio is constructed appropriately to achieve those objectives.
Our first recommendation to the readers is to become an investor rather than a trader. Don’t concern yourself with what will occur in the stock market over the next week, month or even quarter, but rather what do you believe will be the direction of stock prices over the next one to three years. Keep in mind that the media wants you to be a trader so that you will stay abreast of the markets on a daily basis. Become an investor. Tune out the “halftime report” of each trading day. Tune off “market wrap.” Tune off news teasers like “you can’t afford to miss these earnings releases.”
Assuming that you agree and are an investor rather than a trader (trading may have worked during the last bull market, but is counter productive to long term growth of capital), make certain that your stock holdings are diversified across four to six different industries. You therefore are able to weather any unexpected downturns in a particular sector.
A third recommendation that may help you invest more profitably over time is to realize that you will not be right all of the time. However, the important factor is to be right over time. Once again, don’t appraise your portfolio on a daily basis. It becomes not unlike weighing yourself every day. Given these market conditions over the past couple of years, you will never be happy, eventually become exasperated and give up. Measure your performance versus appropriate indices over time and recognize that you will make errors.
What matters during periods of consolidation (see bear market) is that you exit with the right portfolio. Simply put, when evaluating your portfolio you must assess the potential of your holdings as we exit the current economic malaise. Do you own the companies with earnings growth potential? Do you own the companies that are increasing their share of the market? Do you own the companies with a proprietary product or service?
Continue to dollar cost average, investing on a systematic basis through your company sponsored pension plan such as 401(k) or 403(b). Assuming that you are allocated appropriately between stocks and bonds to meet your long-term objectives, it is imperative that you do not make major changes to your investment patterns during this downturn. Use the “sale on stock prices” to continue to dollar cost average. Each dollar invested will now go a bit further in purchasing shares based upon their low net asset value.
Remember that excessive optimism does not yield stock prices at attractive levels, excessive pessimism does. Where do you think we are now?
During times like these it pays to upgrade your portfolio to industry leaders. Do not accept the marginal investments that you currently own. If they will not come out of this bear market as industry leaders, trade up to ones that will.
Once again, utilize this bear market to tailor your portfolio to what you believe the new bull market will consist of when it comes. Then, be patient recognizing that those who can ignore short-term volatility have the best chance of meeting their long-term objectives.