Boy, I can't tell you how wonderful it is not to work a brokerage firm anymore. I can think straight, analyze the markets rationally, and be able to tune out the miss information without interference from bias sources.
Its really comforting to have a heavy cash position during stock market corrections.
Brokerage firms have a bias to keep you invested at all times. Now that the industry has moved from charging you fees insted of commisions, they must keep you in the market to justify their charges. If your portfolio was 70% in cash, charging fees for this type allocation may be frowned upon.
Yesterday I said;
Going forward, the market will attempt some kind of rally for a day or two. Typically, when markets close at or near the lows, a re-test of those lows usually occurs.
I am not expecting today to be the start of a new move to higher ground. Reversals of a trend usually occur in the midst of a large sell-off.
For those of you who are still hanging on to the market hedges; Rydex Tempest 500 Fund (RYTPX), or the ProFunds Ultra Short S&P 500, we may see 11,700 on the Dow before this correctional phase is complete.
Now, I am waiting for a move below 12,000 on the Dow. In this corrective phase, most investors will be looking for a 10% decline from the highs set last month. I will begin raising my asset allocation percentages when the market corrects by 8%, which is around 11,700 on the Dow.
How much will our allocations increase?
Our current recommended allocations are as follows;
60% Equities: (Normally 95%) Aggressive
50% Equities: (Normally 80%) Moderately Aggressive
40% Equities: (Normally 60%) Moderate
20% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative
At 11,700 (8% correction) on the Dow, we will be raisng our allocations as follows;
70% Equities: (Normally 95%) Aggressive
60% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
25% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative
On a 15% pullback, we will be raisng our allocations to;
80% Equities: (Normally 95%) Aggressive
70% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
30% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative
On pullbacks of 20% or more, we will get fully invested;
95% Equities: (Normally 95%) Aggressive
80% Equities: (Normally 80%) Moderately Aggressive
60% Equities: (Normally 60%) Moderate
40% Equities: (Normally 40%) Moderately Conservative
20% Equities: (Normally 20%) Conservative
Keep in mind the 100%-minus your age rule.
At the beginning of every correction, you will see many experts begin to call the bottom at 10%. The truth of the matter is no one really knows where the bottom or top of the market is. So, the best approach is to gradually raise your allocation levels with the understanding that;
1) The market could go much lower than you expect.
2) You might not be able to get fully invested at all times.
3) Keeping a larger than normal position in cash is not necessarily a bad thing.
The "real" bottom in any investment is when no one wants to invest in it. In 2002-2003 no one wanted invest in technology stocks. That was a bottom. When the screams from the real estate crowd begin to stop calling for the bottom, and start saying, "I'll never invest in real estate again", that will be the bottom.
While I like to invest in the stock market on any decline of 10%, I am enamored with investing in stocks after a 20% decline. 20% declines do not happen often, but when they do, its always nice to have some cash laying around.
