This Key Rule Will Help You Keep Your Investing Simple
Between price targets, charts, portfolio balancing, regression to the mean, and a host of other terms and concepts, investing can get pretty overwhelming pretty quickly.
Real-money columnist Paul Price says there are ways to make it all clear, starting with a simple rule.
“On Monday, the S&P 500 was down 12.20% in the first 50 trading days of this year,” Price recently wrote on Real Money. been long stocks.
However, adds Price, “it was a great opportunity if you have the money to put in the work.”
It’s Warren Buffet’s investment rule: sell when everyone else is buying; buy when everyone wants to sell.
When the market is down, it’s a great time to start buying cheap assets.
Equally important, Price points out, it’s not just that major declines are temporary. They are usually short-lived.
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“Of the 10 worst starts to years in the stock market, only two ended up falling more from that time until December 31 of those same years. One of those two, the year 2001 did not yielded only 0.26% more.”
Further, “The only example of significant continuing losses was 2008. The incredibly bad sell-off that year continued until March 9, 2009 before making a 180-degree turn, resulting in a gain of 43 % on the rest of this year.”
And in fact, “the average of the 10 putrid starts turned into average gains of 29.10% through the end of the year, including the two down years (2001 and 2008).”
Take-out? Part of it is a lesson in investing. Buy when prices are low.
However, in more technical terms, it is that the value of your holdings moves counter-cyclically with the market. When the market is rising, it’s a good time to hold a lot of stocks. These assets will increase in value as prices rise (until you sell them, ideally during this peak). When the market is low, it’s a good time to be cash rich. You will have the money on hand to invest.
The counter position can leave an investor somewhat paralyzed. If you have a lot of cash during a bull market, it’s hard to find investments that will justify the expense. Your gains will likely be marginal. If you have a lot of stocks during a bear market, you generally want to hold those assets until they recover their value.
Therefore, for an investor, it is wise to be ready to move. Don’t necessarily try to time the market, but keep an eye on your liquidity. You don’t want to miss the opportunities a bear market can create.
Please note: It is important to remember that you should not buy or sell a stock based on reading an article. Investors should do their homework. For more research and insight, consider TheStreet Quant Ratings for a quantitative approach to stock picking. Or, get a daily dose of TheStreet’s smartest insights from its smartest analysts, delivered daily to your inbox via TheStreet Smarts.