Monday, 3 November 2008

Investing in a Bear Market

Stocks Bear Market Long-term Investing Strategy :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website
The sum of the previous analysis suggests that we can discount a 1930's style wipeout of the stock market, and viewing a volatile sideways trend for at least the next 6 months to be followed by an gradual upward curve.
An analysis of the situation at FTSE stock market. Done even before the last week's lows. Forecasting slow upwards movement from there.
Glad that I came to the same conclusions. Buy at dips and in installments as the market is so volatile. The only reasonable thing is to average the whole low period instead of gambling on the bottom in one go. I've "had" so many bottoms in the past couple of months. Fortunately, I invested only small amounts and generally averaged down the initial investments. And, yes, just like Buffett, I'm more interested in steady flow of dividends than the stellar jumps of growth stocks.

Here is the most important part of the article, listing step-by-step instructions on how to invest in a bear market:

An investment strategy needs to take these factors into account to determine when the anticipated capital is to be invested.

  • Bear Markets Analysis - Favors buying on selloff's during the post 30% drop bear phase.
  • LIBOR is frozen so is a negative for investing at this time. The aim is to see LIBOR to fall to below 0.7% above base the interest rate. Current is 1.16%, the more it falls the more bullish the outlook for the stock markets.
  • Chart price patterns remain negative, they clearly indicate that the stock market is not done on the downside.

Therefore the rules for stock market investing are -

1. Allocate the amount of capital that is to be invested over a period of time as 100%.

2. The aim is to invest between 5% and 15% per month of the above capital.

3. The trigger for 10% investment in any month is if the stock indices one is investing are within 10% from the bear markets low.

4. The Trigger for an additional 5% investment is if in any month LIBOR is below 0.7% above the base interest rate.

The goal is to scale into the stock market over the next 6 to 12 months i.e. effectively buying into weakness rather than strength and limiting investing when the market exhibits a sharp rally. This implies an investment range of between 5% and 15% in any given month.

I.e. if the intention is to invest $10,000 into the stock market then one would aim to invest between $500 to $1,500 in any month that fullfilled the investment criteria.

Therefore depending on how the stock market performs over the next 12 months, the amount invested in a stocks portfolio should gradually increase towards the 100% commitment.

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