Seems like the stock markets manage to remain at or near all time highs while at the same time the world is unstable… quite something to consider. Government and bank manipulation of interest rates have driven people out of safe and responsible fixed income and into overweight position in riskier stocks.
Should I buy now with both hands because this is as low as the market will go? or should I wait until some world event (or the reality of the poor global economy) triggers a significant pull back? Should I sell everything now at market highs? What should I do?
Avoid investing based on emotions or impulse. Instead, start by developing a longer term personal financial investing strategy… a plan… and spend time reviewing how to adapt for the current environment.
For those of you who are not yet in a position to be investing in the stock market, I encourage you to continue working on the basics we cover elsewhere in our teachings… learn to earn an income consistently and then work hard to increase it, learn to budget and save… differentiating “wants” from true “needs”, develop an emergency fund in cash for surprises that always come, give to others in a way that honors God by investing in His kingdom. Your time may yet come when you will be well prepared to invest in stocks. Do not rush it lest you take on risk you are not ready for… as a child sprinting into the street to get his favorite ball, not aware of the oncoming cars.
For those that are in a position to invest in stocks… today’s article is for you. To begin with, you should have a plan before you just buy stocks, so if you are a beginner and not yet in the market, you need to do a bit more homework before you just buy a stock for a company you like because it is less expensive than it was before. This is not a robust strategy. You need diversification, an identified list of goals and objectives, a specific timeline for your investment… you need to be prepared. Plan carefully and seek wise advice. We have covered this too in other articles on our site.
Stocks that are falling, can fall much farther. In financial investing many use a parable of a “falling knife”. In other words, be careful trying to buy into declining stocks to greedily. If they have not found their bottom yet, you may be reaching out to catch “a falling knife”. When you do that… it hurts. As an example to illustrate… you see stocks decline 10% and you jump in with both feet… only to see them decline another 10-15%. Ouch. Let’s hope you don’t then panic and get out before they recover.
On the other hand, stocks that are near all time highs can actually go higher.
If you are a well prepared investor with a solid plan, you have prepared for this market volatility. You have a portion of your investing funds set aside as cash or “dry powder”. In other words, you are anticipating that you will have an opportunity to purchase stocks when there is a decline (ammunition ready to fire when needed). Now… what to buy, how much, when… all still important questions.
It is very important to identify a time horizon for your investing. Most of us should avoid day to day or month to month “trading” and instead focus on longer term investing such as over a few years or even a retirement portfolio. This important perspective is key in identifying what to buy and when and how much.
Dollar cost averaging is your friend. Hopefully you have previously set targets for specific diversification of stocks you would like to have as prices fall that would best diversify and boost your portfolio. This is part of having a plan. Then you buy some as the stock you are following falls. You do not do this on a whim or as a reaction to falling price. You have already done homework and seize the opportunity to invest in something you already targeted and studied. If it was at 100$/share a few months ago, perhaps you set a target to get a starting position (25%) when if pulled back to 95$/share to be followed up with increments again at 90, 80, 70. You do not try to pick the bottom and get all in at that bottom. That does not work.
If you are just now looking for opportunity and have not done a lot of pre-planning… take your time. Look for stability in the market and a support level to be reached that may indicate that the stocks you want have bottomed out… avoid catching the falling knife. You must avoid the temptation to try to pick the bottom. If the stock falls 20%, stabilizes and bounces back up 5%… be content to get a starting position at 15% discount, don’t try to pile all in at the absolute bottom. Greed will cause you great pain. Do your homework while you wait.
Oh… and you almost never want to use all your dry powder quickly because the the market may go lower than you think. You may want some cash left in your account to use over a 3-6 month time period.
If you are fully invested and have no cash position… seriously consider getting some investing help to make good decisions on how to reduce the risk of your portfolio through diversification, stocks with high dividends, and even creating a cash position… yes even if you may have to realize a loss by doing so. Avoid the trap of staying in a bad position in your portfolio just to insist to yourself that it will recover and you did not take a loss on that investment. Do you really want to go hunting a bear (e.g. “bear market”) with no dry powder?
Be careful. Do not be greedy. Avoid impulse and emotion. Hunting bears (e.g. “bear market”) can be dangerous game, and it can also be dangerous to be “all in” when markets are already overpriced and dependent on government manipulation of interest rates.
Remember that all you have belongs to God. Manage your money God’s way. Visit GrowGodsMoney.org .