The S&P lost 4.9% for the week, the Dow shed 4.2%. I have no idea if it will get worse or not. As you know, top-down stuff isn't something I even try doing.
I do know that it has been a while since we've seen a 10% or 15% correction -- or even a 20% one. And if your brokerage statement got bloodied up this week, well, expect more of the same if the market sell-off reaches double digits.
It's no fun. Not for you. Not for me. But if you've invested decently over the past few years you're still up.
And, as I pointed out in my post Everybody Wants To Go To Heaven, But Nobody Wants To Die, these market drops can offer bargains. In the face of seeing current positions taking a (hopefully short-term) hit.
Ideally, I'd like to see the broader markets continue selling off -- very dramatically and for the very short term. Just long enough for us to scoop up the type of bargains that come around once every few years. Then once we've stocked up the markets start rising for a very long time.
But that, as Sam Spade said in the movie, is the stuff that dreams are made of. The stock market can just as easily give us nightmares if we're not careful. So my course of action is to continue investing with a long-term time horizon and let your patience be the virtue it should be. Nobody knows what's coming in the short term.
Here's a question for the experienced:
If there is a correction or we go into a bear market, how do you decide whether you should add to your existing positions or look for new investments?
The answer may seem obvious but is it?
Posted by: Sivaram Velauthapillai | July 29, 2007 at 01:05 AM
You have to keep in mind that this cyclical bull market has been going on since OCT 2002 which makes it long in the tooth by historical standards.Also during that time period we didn't have one 10% correction which is unheard of.The media mantra over the past few months was that the sub-prime problem was 'well contained' the only thing that was well contained was the truth. Now the truth is coming out and that has frozen the credit markets. Without the liquidty that drove this market higher it will die on the vine. Keep in mind that as a matter of size currency markets are first then the bond/credit markets then the lowly stock market. Tight money is not good for stocks, period. I suggest you do some reading how the sub-prime credit market in the USA has effected the foreigns appetite for USA corporate debt and all the other package wild ass bonds that they were bundling and selling to lets say, chumps. But that's the Wall Street way, put lipstick on a Pig call it a beauty and sell it to the chumps. Whether it be junk bonds or junk IPO's ie read Blackstone selling out at the top now down 27% in a month. Sure stock come back but it just took the S&P 500 index 7 years to get back to the 2000 high. Talk about dead money. Before you get all excited about the 30% gain the in the Dow keep in mind the USD has lost 35% of it's buying power over that same period of time. Nominal dollars mean nothing it's what you can buy for your dollars. So the rise in the market since 2002 has to be inflation adjusted or your just fooling yourself.
Posted by: reed jones | July 29, 2007 at 11:00 PM
For that guy who wanted to know when to buy into a decline. Nobody knows where the bottom is until after the fact. I can only tell what I do. I start my buying when the market is 20% off the high. I will buy once every month until the funds I set aside for investment are exhausted.I will never buy it all at once but leg into the market over that 6 month time frame. The purpose of that is if it keeps going down I'm buying at a better level and buying more.If it goes down for 3 more months I have done better then buying it all at one time.If it turns up after a 20% decline at least I purchased some at a better level and I would continue to buy every month like I said till I was fully invested again.
Posted by: reed jones | July 30, 2007 at 01:19 AM
Folks: speaking of time periods, I like to ask for a rough definition of what someone means when she/he speaks of the short- and the long-term.
Reed Jones: how have you come up with the 20% decline buy-in-point, and the 6 month buy-in-period?
Posted by: Moon | July 30, 2007 at 08:13 AM
Moon: There is no set rule for short or long term each person has their own definition. Mine is the short term is weeks. The long term is years or a cyclical bull or bear market.
I come up with that 20% buy point from 33 years in the Futures and stock markets. My models have shown that it is a decent place to start 'new' buying for a long term move higher. That doesn't mean that it can't go down 30 or 40% from the highs, it only means from a mathematical viewpoint it cuts your total risk down while inceasing your total return.
Now, in the short term right here, I expect a rally up the rally will fail and we will be making lower lows. The next six months will not be a good time to be long common stock.
Posted by: reed jones | July 30, 2007 at 09:07 AM
I agree with the notion that the ideal selloff would be a continued short term market swoon to create numerous values in quality companies, but it seems that will not be the way it will work. I'll wait a little more for some discounts.
Posted by: Aaron | August 02, 2007 at 06:48 PM
Aaron: I don't think the sell-off has been steep enough to offer great bargains (yet). So waiting may well prove beneficial.
Posted by: John | August 02, 2007 at 10:32 PM