Thursday, January 17, 2008

Time to Bottom Fish

Falling, falling ...
Today the S&P 500 ETF (SPY) dropped another 2.6% to 134. A few months ago SPY was flirting with 155. And since then the market has been vacillating and has definitely taking a beating in the last few weeks. We are still not in an official bear market since the market is only down 12% from its recent highs. SPY trading at around 125 (20% decline from the 2007 high of 155) would be indicative of a bear market. So are we going lower?

Maybe, maybe not! A retraction was on the cards and some of the recent excesses needed to be worked out of the system. The market pundits have been touting the ‘Goldilocks Economy’ but the economic reality is looking pessimistic. Oil prices are high, inflation is
Mega Sale?
creeping up (higher prices), housing market is in shambles, credit turmoil is still unwinding, manufacturing is slowing and the consumer sentiment is eroding.

So what to do now? Look for bargains since there is a sale going on. Some items are 50% off (Citibank), some only 20% (Intel) and some are still not on sale (IBM). So is the mega sale on – I don’t know and therein lies the buying dilemma. Should I wait, should I jump in now, is this the bottom …

For times like these – here is my investment strategy

Google still rules
What do I want to invest in?
In other words where do I want to be invested 5-10 years from now? What sectors and stocks do I think will be winners once the current financial crisis is behind us? Who will benefit from the global boom, the IT investment, the development and sales of new technological products/services? This is where market research, mega-trend analysis and future projections come into play. This homework yields a set of stocks (or ETFs) that I feel will be uniquely positioned in the long run to make money. At a broadly diversified level I may just bet on the US economy or if I know enough about a sector/industry (like IT) I may venture into individual stocks. The key is knowing where you want your money to be invested in the long run.

How much do I want to invest?
What I am hoping to invest in this market is a subset of my overall portfolio. No – I am not liquidating all my assets and jumping in the market. Regular tweaking of my asset allocation and investing diligence allows me to leave the bulk of my portfolio invested in long-term interests. It’s a matter of risk/reward preference but a portion of your overall portfolio should be earmarked for finding bargains in the current market.

When to invest?
Buy the dip
Two schools of thought here - all at once or a little bit at a time. I prefer a little bit at a time. I don’t know how long the market will be in a bearish state. A reasonable assumption may be six months to a year. Maybe more but the possibility of the bull market returning next quarter looks remote. So I buy on the dips. Today was a buying day. There will be other buying days in the future. When I am fully invested in the next six to twelve months – I stop. The market may drop further after I am done investing – but I don’t know that so why worry about that.

When markets are volatile and bearish – bid your time, seek bargains, know what you want and incrementally load up. Happy hunting!

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