Thursday, October 23, 2008

First rule in a bear market: RELAX



Relax. Keeping your head clear in these market conditions will give you a big contrarian advantage over all of the other investors who are pulling their hair out right now. When everyone else is complacent, like October of last year, that is a far better time to be on edge.

Because bear markets are relatively unpredictable, I only put my money in a bear fund when it's obvious that the next drop is coming, like it was on May 21st and August 19th.

Until the indicators align like that again, I will remain in cash.

"But what if the market goes down? You should be in GRZZX!"

"But what if the market goes up? You should be in SSO!"

No-no-no. That's a great way to get an ulcer and big doctor's bill. Here's how I see the future when I'm floating on my peaceful pile of cash (or short-term treasury fund):
  1. If the stock market goes up from here, then that will simply set up the next predictable drop, and I'll make money on the downside with GRZZX.
  2. If the market falls from here, then that will make the dividend yield of the S&P 500 even higher when I eventually get back in to stocks.
  3. If the market goes sideways like it has been recently, then who cares?
Sure, this means I'm in cash sometimes when the market makes a big move, but more importantly it means that I'm much less likely to suffer a big loss by going out on a limb when the indicators aren't in alignment.

Yes, I'm Baloo the Bear when it comes to timing a bear market. Day traders and risky-rally-riders will have to look elsewhere for advice.


Anonymous said...

what dividend level would you want to be invested in?

Jody said...

There's no limiting dividend yield that would keep me out of the market when the bear market comes to an end. If the S&P 500 falls far enough, I might consider SPY (which actually owns stocks) when the bear market ends in order to collect the dividends instead of taking the 2x price motion of SSO.