| A correction is a beautiful thing, simply the flip side | | | | 6. Your understanding and use of the Smart Cash |
| of a rally, big or small. Theoretically, even | | | | concept has proven the wisdom of The |
| technically I'm told, corrections adjust equity prices | | | | Investor's Creed (look it up). You should be out of |
| to their actual value or "support levels". In reality, | | | | cash while the market is still correcting... it gets |
| it's much easier than that. Prices go down because | | | | less scary each time. As long your cash flow |
| of speculator reactions to expectations of news, | | | | continues unabated, the change in market value is |
| speculator reactions to actual news, and investor | | | | merely a perceptual issue. |
| profit taking. The two former "becauses" are | | | | 7. Note that your Working Capital is still growing, in |
| more potent than ever before because there is | | | | spite of falling prices, and examine your holdings |
| more self-directed money out there than ever | | | | for opportunities to average down on cost per |
| before. And therein lies the core of correctional | | | | share or to increase yield (on fixed income |
| beauty! Mutual Fund unit holders rarely take profits | | | | securities). Examine both fundamentals and price, |
| but often take losses. Additionally, the new breed | | | | lean hard on your experience, and don't force the |
| of Index Fund Speculators is ready for a reality | | | | issue. |
| smack up alongside the head. Thus, if this brief | | | | 8. Identify new buying opportunities using a |
| little hiccup becomes considerably more serious, | | | | consistent set of rules, rally or correction. That |
| new investment opportunities will be abundant! | | | | way you will always know which of the two you |
| Here's a list of ten things to think about doing, or | | | | are dealing with in spite of what the Wall Street |
| to avoid doing, during corrections of any | | | | propaganda mill spits out. Focus on value stocks; |
| magnitude: | | | | it's just easier, as well as being less risky, and |
| 1. Your present Asset Allocation should be tuned | | | | better for your peace of mind. Just think where |
| in to your long-term goals and objectives. Resist | | | | you would be today had you heeded this advice |
| the urge to decrease your Equity allocation | | | | years ago... |
| because you expect a further fall in stock prices. | | | | 9. Examine your portfolio's performance: with |
| That would be an attempt to time the market, | | | | your asset allocation and investment objectives |
| which is (rather obviously) impossible. Asset | | | | clearly in focus; in terms of market and interest |
| Allocation decisions should have nothing to do with | | | | rate cycles as opposed to calendar Quarters |
| stock market expectations. | | | | (never do that) and Years; and only with the use |
| 2. Take a look at the past. There has never been | | | | of the Working Capital Model (look this up also), |
| a correction that has not proven to be a buying | | | | because it allows for your personal asset |
| opportunity, so start collecting a diverse group of | | | | allocation. Remember, there is really no single |
| high quality, dividend paying, NYSE companies as | | | | index number to use for comparison purposes |
| they move lower in price. I start shopping at 20% | | | | with a properly designed value portfolio. |
| below the 52-week high water mark... the shelves | | | | 10. So long as everything is down, there is nothing |
| are beginning to become full. | | | | to worry about. Downgraded (or simply lazy) |
| 3. Don't hoard that "smart cash" you accumulated | | | | portfolio holdings should not be discarded during |
| during the last rally, and don't look back and get | | | | general or group specific weakness. Unless of |
| yourself agitated because you might buy some | | | | course, you don't have the courage to get rid of |
| issues too soon. There are no crystal balls, and no | | | | them during rallies... also general or sector spefical |
| place for hindsight in an investment strategy. | | | | (sic). |
| Buying too soon, in the right portfolio percentage, | | | | Corrections (of all types) will vary in depth and |
| is nearly as important to long-term investment | | | | duration, and both characteristics are clearly visible |
| success as selling too soon is during rallies. | | | | only in institutional grade rear view mirrors. The |
| 4. Take a look at the future. Nope, you can't tell | | | | short and deep ones are most lovable (kind of like |
| when the rally will come or how long it will last. If | | | | men, I'm told); the long and slow ones are more |
| you are buying quality equities now (as you | | | | difficult to deal with. Most recent corrections have |
| certainly could be) you will be able to love the rally | | | | been short (August and September, '05; April |
| even more than you did the last time... as you | | | | though June, '06) and difficult to take advantage |
| take yet another round of profits. Smiles broaden | | | | of with Mutual Funds. So if you over think the |
| with each new realized gain, especially when most | | | | environment or over cook the research, you'll |
| Wall Streeters are still just scratchin' their heads. | | | | miss the party. Unlike many things in life, Stock |
| 5. As (or if) the correction continues, buy more | | | | Market realities need to be dealt with quickly, |
| slowly as opposed to more quickly, and establish | | | | decisively, and with zero hindsight. Because amid |
| new positions incompletely. Hope for a short and | | | | all of the uncertainty, there is one indisputable fact |
| steep decline, but prepare for a long one. There's | | | | that reads equally well in either market direction: |
| more to Shop at The Gap than meets the eye, | | | | there has never been a correction/rally that has |
| and you run out of cash well before the new rally | | | | not succumbed to the next rally/correction... |
| begins. | | | | |