A couple of weeks ago, financial commentator Greg Heberlein said it was time for a stock market correction. Sure enough, we've seen the market drop, spurred on by events in the Middle East and the earthquake, tsunami and nuclear crisis in Japan.
Is it time to buy back in? One never knows for sure, but on this week's Money Matters, Greg tells me what to watch for.
The bottom of the correction, 5 to 15 percent down, often is not reached until maximum pain occurs. Those hanging on the longest start to capitulate, fearful a bear market is around the corner. That’s when the savvy investors start getting back in.
But how do you know when that turn comes? You see violent swings one way or the other, tricking you into thinking the end has occurred when sometimes it is only temporary. Here’s one strategy:
Do your research, pick your stocks and/or mutual funds to invest in.
In troubling times, conservative, dividend-paying stocks are an excellent way to start. Smaller companies with prospects for much bigger advances may be appealing, but carry the greater chance of disappointment.
Those who want to get back in the market, or those just starting out, may discover the best alternative is a mutual fund. Such large pools of stock insulate you from making bad individual stock choices. The best way to do that is to buy a Standard & Poor’s 500 index mutual fund. The S&P 500 fund gives you instant diversity. The 500 represent 75 percent of the value of all U.S. stocks. You are buying the market.
Divide your money into thirds or fourths and plan to buy in increments.
Pick a point - 5 percent? 10 percent? - above the lowest price. When your stock has rebounded that much, put a quarter or a third of your money in. When it moves up another increment, put in another quarter or third. That smooths your way in and helps avoid a big loss if the market gives you a despicable head-fake.
Five or ten percent?
The daring may go with 5. More conservative investors will pick 10. An option would be to wait for the first 10%, then add as your stocks or mutual funds gain in 5% increments. Most brokerages make this easy by allowing you to set buy points, so you are alerted either when you reach the point or are automatically reinvested.
Is this is too conservative?
After all, the biggest moves often come at the beginning of the uptick. But consider this: The stock market recently completed a 90 percent run-up in less than two years. If you missed the first 10%, would you be sorry to see your portfolio climb only half of that, or three-quarters?
