Market declines are as much of an opportunity as a rising market. The direction is different, but the compounding effect is the same. The facts bare out that declines happen less frequently and last short time periods, but they are effective in building your portfolio. The hard part for most investors is the psychology of selling. The connotations are negative and go against the mindset of most investors. Thus, the challenge with being short the market in a downtrend. In fact many will spend the downtrend banging their heads against the wall trying to find the bottom. This is no way to approach the investment process. “The trend is your friend”, or at least that is the mantra that many of us tend to ignore when it goes against our way of thinking.
Downtrends develop the same as up trends. Emotions are the primary reason. The panic effect creates climax selling periods which accelerate the down cycle. The ETF world has made the process of being short the market easier for the average investor. Inverse ETFs allow you to ‘buy’ a fund that performs the function of shorting. This psychologically works for most investors and takes away the pain of figuring out the process. When you believe the market is going to reverse directions you simply sell your inverse ETF.
Equal opportunities in market declines is buying stocks or sectors using ETFs that offer value relative to future growth. After every correction ends there is value in specific sectors and stocks. Taking advantage of this is accomplished by having a strategy for capturing the moves as they establish themselves. In 2002 as the market began to build a base or bottom you could have built positions in technology, financials, energy and other sectors that eventually rose more than 200-300% over the next 3-5 years. The key is dealing with the four inches between your ears and looking for the value versus having a doom and gloom attitude.
As I stated above trend analysis is one approach or strategy for tracking and capturing the benefits of a downtrend or uptrend in the market. For long term trends using weekly or monthly charts allows you to see clearly what is taking place in any sector, stock of fund. Shorter to intermediate term trends can be seen on daily and intraday charts. The shorter the time period the more volatility and more frequent the trend changes occur. Your portfolio goals will determine the time frame as well as the type of assets you trade. Developing disciplined trading strategies is the key to successful investing. Take the time to know what you want. Establishing the ‘why’ factor first. Then develop strategies for investing in up markets as well as down markets. Both present you with opportunities. The strategy and discipline you implement will determine how you benefit from the opportunities.
We have now covered two steps in helping yourself build a winning strategy series. Step one, “the why factor of investing” – knowing what you want from your money is vital. And step two “market declines are opportunities” – the trend is your friend up or down. Step three will cover, “focusing on the positive” – finding the positive will lead to positive results in your portfolio.
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