What to do during uncertain times.
When the stock market is tossing and tumbling, we become more vigilant and more excited. In our household, we’ve been having more debates about what should we be doing as things appear more and more uncertain in the various financial markets.
What’s confusing to us is that some of our sources — places where we get our information to make our own forecasts — are giving us seriously mixed signals. Some sources are telling us that everything is going to hell in a handbasket, while others are beginning to sing the tune of a buying opportunity somewhere in the horizon. On top of that, some investment bloggers are uncertain about their positions, thinking that any kind of dip may be a dead cat bounce.
The truth is, throughout my investing history, whenever things have become uncertain like this, I’ve only done one thing, and that was to build our position in equities further by buying more shares when they got cheaper. It was comfortable to dollar cost average down because youth was on our side and we weren’t really bothered as much by the volatility. I used to think: “If the market dies, so what, I’ll just make up the difference with my consulting income.” And that thought was my security blanket. And looking back, that strategy turned out pretty well.
The only time we ever pulled the plug on the market was when we sold out about 65% of our equity holdings on January 2000. That was when our sources gave us heavy warning about the upcoming debacle expected to hit the dangerously peaking market. As I worked in a startup at that time and felt the hype and frenzy of internet stock fans at work breathing down my face, I felt that the market was becoming insanely irrational. After all the animated arguments I’ve had with the leveraged traders at work who laughed at me for being relatively conservative, my gut feeling confirmed that it was time to lighten up.
Fast forward to today: this time around, we’re older, with limited cash flow and income. We’re reasonably invested but there’s a tug-o-war happening in us: our clocks are telling us to slow down a little, but our portfolio is looking a little too stodgy. So we’re evaluating possible moves.
What can we do during this current market phase?
#1 Understand what’s upsetting the market.
A technical break in the stock market’s movements and a shift in market direction should prompt you to revisit overall economic indicators. If they’re still positive, you may assume that the impact of a one day (or few days’) sell off won’t be felt for long and the markets should eventually rebound. It’s when there’s a basic underlying change in the economy that a technical break like this can be the start of something more ominous and potentially damaging to the markets.
Time will tell how a one day slump will turn out. But it will be one of the following:
(1) A blip or non-event (market recovers quickly without a dent in it)
(2) The start of a correction or a drop of at least 10%, but not more than 20%
(3) The start of a correction that eventually presents a buying opportunity
(4) The start of a long term downward trend (bear market activity)
Depending on whom you ask, you may get different answers on what will happen next but the key is to sift through the news and analysis to determine how overall fundamentals are doing. By keeping abreast with such information, you can at least anticipate some general market movements and not get too shocked when equities make like a roller coaster.
#2 Wait for a buying opportunity and increase our equity position.
Do what we’ve been accustomed to doing all our lives, which is to wait for a buying opportunity when the market weakens and take advantage of a developing market correction. If stock indexes go lower from this point, there is a chance we’ll be shifting some spare cash over into stocks. Spare cash here is anything we can afford that is not earmarked for our business capital budget.
#3 Hedge and get into new or underrepresented asset classes.
We haven’t been as sophisticated about trying out other asset classes such as gold or currency plays. But we want to hedge our equities portfolio better so we are considering adding weight to areas that we have a bit more familiarity with and which may benefit from current market trends: real estate and international equities. It’s a possibility that as the real estate market weakens further, that investment opportunities pop up in our local area. We may think of pooling our resources with friends to get into rental properties. Or more likely and primarily for the simplicity, we may just carve out a position in REITs. Another move would be to raise the allocation of our international equities from roughly 10% to a maximum of 25%.
#4 Rebalance our existing portfolio.
We can also do the simplest thing and just rebalance our portfolio after the recent market shifts we’ve seen. This would just entail staying with our intended allocations and making sure our investments are still conforming to their stipulated amounts.
#5 Sell and lighten our position.
I’ve had some arguments with the spouse on this one. For some reason, he’s somewhat convinced that the issues with subprime mortgage lending will spill over and create greater havoc everywhere else. Gee, wherever could he be getting such ideas? He’s nagged me about “selling” equities in favor of other investments (see #2). I think I’m going to relent. We’re planning on moving our most concentrated single stock investments into the diversified total stock market.
#6 Sit tight and do nothing.
This is a prerogative that you have during crazy times like these when we hear that certain parts of the economy are unraveling. Stay put and stay the course. It’s also called “buy and hold”. Given that, I prefer to review our positions first before seeing if it could benefit from some tweaking. If there are fundamental reasons to break out of the inertia that is “buy and hold”, then we need to reevaluate and see if we can capitalize on these changes in the financial and investing landscape.
In Conclusion
Because of what’s afoot these days, we intend to do some readjustments to our portfolio. But first, I’ll need to do a portfolio review and see if we have enough funds to get into additional investments. Beyond this myopic view, we’ll also have to take a step back and see our household’s big picture and consider the risks we’re taking with my spouse’s fledgling startup business. This will be a good time to check how we can evaluate our overall finances against his entrepreneurial visions. Once I determine our current situation in detail, we’ll know our next steps. For now, this material is just to open the discussion for possible changes to our existing financial strategies.
Copyright © 2007 The Digerati Life. All Rights Reserved.
{ 12 comments… read them below or add one }
I like what you have to say about the current market situation. All the options you present appear to be rational and well thought out. Whatever you choose to do, at least it won’t be a rash and emotional decision.
-limeade
Sounds like you’re coping. My boss said she losy 4k last weekend. In a way, I’m glad I have a simple teacher’s retirement investment and a conservative, boring TSA I put into every month. Then again, as they say . . . nothing ventured, nothing gained.
Thanks for the mention, SVB! I am not so sure about whether it’s a good time to enter into REIT (however, it shouldn’t matter that much if you plan to hold the investment for a long time), but for international stocks, I think the good time is still ahead. If you haven’t start in investing in international stocks (or mutual funds) yet, you may want to take a look at DODFX, a very solid fund from a very solid company.
Thanks for the nice words.
I’m really eager to try to diversify further but still haven’t had the nerve to do it. I appreciate your info Sun, I will definitely look at your suggestions, particularly DODFX. I may wait a bit longer for making some of the moves as I try to get my ducks in a row a bit.
I like your ideas especially the first one on what we can do doring this current market phase. It’s important to know when to take action. We can’t just do things which will make us unaware of the current situation. We should be prepared for those opportunities.
Well said. I have dealt with stocks long enough to know. The long term is always better.
Yeah bailing out now would even more hurtful (unless the market spirals down even more). In fact, the best bet might be to invest a bit aggressively in this period….the market will go up eventually and rake in better yeilds for you. In the least, that may sort offset some of the loss that occured because of the sudden fall. Please correct me if I am wrong with this thinking….I am not really sure what the *experienced* players do in this situation.
Heh, well looking back on this post 4 months later is certainly making for some nice entertainment on my Friday night. I like to look back on previous posts to gauge how people are reacting to market news… it’s nice to take the emotion out of trading
Bullish Banker,
Haha! That’s why I make sure my posts have dates on them!
Then we can all go back in time and compare notes and look upon the events of the past with great nostalgia…. 
You are dead on in saying its good to buy more equities cheaper in down times. It only makes cents
People are losing there mind and the media loves pumping drama as well as fear into Joe consumer. IMO We have hit bottom. I’m buying every shipping stock i can get my hand on in preparation for not only Obama’s infrastructure plans, but also the growth of China and India. The wise Buffet is buying. Remember.(as you were in 2000) Be fearful when others are greedy and greedy when others are fearful. I just hope I am wise enough to sell when we get greedy again in a few years.
When a correction is ongoing, you probably shouldn’t be inspired to bail out unless you’re a trader. I certainly wouldn’t, simply because the best redemption moves should be done as part of a “big picture” or longer term strategy and shouldn’t be done in reaction to some event. As much as possible, your investment moves should be proactive rather than reactive.
You may want to ask yourself if the last drop is but a blip in the charts or something worse…. For instance, where’s that 10% drop to signal a real correction? That would be the time to buy in, if fundamentals are still good.