The market was breezing along that year, enjoying one of the broadest rallies ever experienced. From the very start, equity prices seemed incapable of moving lower; only interest rate sensitive investments had that ability.
One major barrier yielded to the next; new all time highs became a weekly occurrence at first, a daily expectation later. Higher and higher the averages soared. Institutions minted glitzy new products, IPOs flourished, investors “morphed” into passively transfixed speculators.
Surely, the markets were “safe” once again… they could relax and look ahead to a secure retirement. But what if the Fed changes direction, or peace breaks out in the Middle East, or planes do what! What then?
Sound familiar? Is this a description of the road to the ’87 computer loop, the turn of the century “dot.com bubble”, or the 2008 “financial fiasco”? All three, you might say.
Each major meltdown was different: different economics, different excesses, different excuses, different durations, different politics, different finger-pointing, and different band-aids applied.
All three rallies were the same: each nurtured institutionally; fueled by the media and accepted much-too-late by individual investors; each terminated abruptly and painfully, with no bonuses returned…
AND, each correction proved to be a “best buying opportunity ever”.
All three were part of the normal market cycle that we have been failing to deal with sensibly since the securities markets began. Market cycles are old news, unavoidable, unpredictable and, perhaps, scary. Unfortunately, most people only think of them as scary when the direction is downward.
Is “up” the only good; are corrections always bad? What do you think?
Growing up in Northwest Jersey, the most popular entertainment around was the rickety old roller coaster at Bertrand Island. The excitement mounted as you ascended the first peak, anticipating the breathtaking plunge; eyes wide open, screaming from the thrill with a white-knuckled grip on your date’s hand, as you navigated the ensuing bumps and turns together, but, also, alone.
The “shock” market is the grown up version of childhood thrill rides, but with no predictable beginning or end, and no way of knowing either the amplitude or duration of the peaks and valleys… only our experience can teach us what to expect and when, what signals to look for and how reliable they may be.
Millions of words are squandered as rallies and corrections grow older. Most gurus guess when the direction will change but few focus on what to do in anticipation and, more importantly, when…
The secret is to operate investment programs within the actual market environment, where volatility and unpredictability are standard… and certainty does not exist. There are four essential rules to follow, and the chart you find here should help you understand why:
Quality: Select equities from a universe of Investment Grade Value Stocks (google IGVSI). These are B+ and higher rated, NYSE, profitable dividend payers… you probably know most of the names. The IGVSI “line” generally falls less than The S & P during corrections and rebounds to new highs sooner. It usually will weaken before the S & P 500 (signaling?).
Don’t buy until a stock is down 20% from its 52-week high; don’t sell IGVSI stocks at losses in down markets.
Diversification: No more than 5% of portfolio “cost basis” (Working Capital) is ever invested in any one security. Diversification minimizes risk, as does Income, Quality, and Profit Taking. Cost basis is also used for asset allocation decisions.
Income: Own no security that does not have a history of paying regular dividends or interest. Asset allocations must include at least 30% income-purpose securities. Tradeable Closed End Funds (CEFs) should be researched to create a selection universe of five-year-old-plus, consistent paying, prospects.
Profit Taking: Establish reasonable profit taking targets for all securities and enforce them religiously. It is significantly more likely that you will realize a 10% gain in a short period of time than it is a 20% gain. Set your target at 10% or lower and you will see the impact of the compounding. One year’s interest in advance or 10% is a reasonable CEF target.
Income CEFs generally move lower months before bubbles burst, rarely fall as far during corrections; and continue to pay income to fuel buying activities throughout.
Now back to the chart for the “what ifs”. If you have the patience/discipline to operate this way, your Wall Street roller coaster ride will become more productive and enjoyable… all the time and without either ETFs or mutual funds.