Stock markets: Where’s the bottom?

We all knew it was going to be a bad week. Few people expected it to be that bad. One number tells the story: the Dow down 1370 points for the five trading sessions, the worst one-week percentage loss since the midst of the Great Depression in 1933.

No one knows if it’s over, or even near over. We’re in uncharted territory. The optimistic view is that last week the “capitulation phase of the bear market, the massive sell-off that signals the end of the plunge.” The pessimistic view is that we haven’t seen that yet.

I’m inclined to the pessimistic side simply because there are so many uncertainties hanging over us-too many shoes left to drop. My concern is that investors will become even more upset and those hanging in will finally succumb and go to cash. That’s when we’ll really see the capitulation.

Bargain hunting?
In the midst of the market carnage, I received an e-mail from someone asking whether it was time to buy. He listed a range of specific stocks. My response is that widespread bargain hunting at this time is not a great idea.

I think we may be in a situation somewhat akin to the period that followed the attack on Pearlarbour in 1941. On the next trading day, the Dow fell 6.5 per cent, about the same as we saw when the New York market re-opened on September 17th.

But there was no quick rebound, and, after a short-lived bounce, the market kept grinding down, depressed by ever-worsening news from the war front as the Allies suffered one defeat after another.

By late April of 1942, the Dow had lost another 17.4 per cent. It was only after the fortunes of war began to turn that the Dow started to rise again, buoyed by the stunning U.S. victory at Midway in June of that year.

Long, hard slog
By the end of 1942, the Dow had fully recovered the ground it had lost after the Japanese attack. By V-J day in 1945, it was up more than 50 per cent from its pre-Pearl Harbor level. But it was a long slog to get there. I fear this may be as well.

Many years ago, the late Andrew Sarlos told me: “Preservation of capital is the first priority of the investor.” Wise words, and we should heed them now. With stock prices so beaten down, the temptation to buy will be strong.

In some cases, selective buys will be justified. But think carefully about the company’s prospects if we plunge into a long recession. Make sure the firm is strong and then only buy when the price is a genuine bargain.

Right for you
This does not mean that you should stay out of the stock market altogether. Even in the toughest times, some companies continue to generate decent profits. Others will position themselves to lead the rally when it does come.

Rather, your approach should be to decide on a level of equity investment with which you are comfortable. It may be 30 per cent, 40 per cent or 50 per cent. That’s a decision only you can make.

Then determine how to best allocate your resources. Decide in each case whether a particular stock or mutual fund is right for you, and if it is something that you want to hold within the equity parameters you have set.

It’s a process that will require more discipline than many people have applied in the past. But in these rapidly evolving times, that’s a necessary price.

From the Internet Wealth Builder.