It is difficult to make money in a bull market, but what do you do when you are in a bear market? In what direction should you go not only to make money but to protect what you have from loss?
Almost immediately investors think what should I buy that will help me reach my financial goals? This answer may not be the one you will like. It is really not important what you buy as long as you know the rules of the game - the stock market game.
Rule One. You must know the general trend of the market. Is it going up or is it going down? You don't know and worse yet you don't know who does. There are many who do and you can be one of them if you wish, but you must also be willing to put aside the conventional wisdom of Wall Street otherwise known as lies. They tell you that you cannot time the market. You can and it is easy. I have been doing it for almost 20 years and so have many of my friends. Unfortunately, brokerage companies do not want you to learn this simple technique to protect your investments.
Once you know the general direction of the market you can act accordingly. If the trend is up you should own stocks and mutual funds. If it is down you should be out of the market in a money market fund or in bonds.
Go on the Internet to the web site www. bigcharts. com . Here you can type in the basic symbol for the S&P500 Index, SP500, and then use the Interactive Section to put in a 200-day Moving Average. If the price of the Index is below this line you should be in a money market and, if above, you should be buying stocks and no-load mutual funds. It is that simple.
Rule Two. Whatever you buy, and I don't care what it is, you must set a price below which if it drops that you will sell out. Period. As your equity moves up so should this stop-loss price so as to protect your profit. You don't want to give that back when the market or this particular equity starts down again.
The market direction changes from up to down in a rather steady cycle of about 14 to 16 years. It has been doing this since 1800. The year 2000 saw the top of the most recent up cycle and it is expected to repeat with another downward direction for the next 11 years. That is not very encouraging to people who have their retirement funds in a 401K or IRA. During this period a money market account will outperform a stock account.
The only alternative is a no-load bond mutual fund. This is better than trying to buy single bonds as there is always the chance a company will go out of business leaving you with nothing. Government bonds are excellent and safe.
Whether or not you agree the direction of the stock market remains down you should plan on a loss limit for the equities in your portfolio.