The adjustment is something beautiful, just the other side of the rally, big or small. Theoretically, even technically, I am told, the adjustments adjust the cost of equity to their actual value or “support levels”. In fact, it is much easier than that. Prices are declining due to speculators ‘reactions to news expectations, speculators’ reactions to actual news and investor profits. The two former “causes” are more powerful than ever because there is more “self-directed” money than ever. And in this lies the core of corrective beauty! Mutual fund holders rarely make profits, but often make losses. Opportunities abound!
Here is a list of ten things you need to do and / or think about during adjustments of any scale:
1. Your current asset allocation must be in line with your goals and objectives. Resist the desire to reduce the distribution of your own capital, because you expect a further decline in stock prices. This would be an attempt to restrict the market, which is (quite obviously) impossible. The correct distribution of assets has nothing to do with market expectations.
2. Look at the past. There has never been a correction that hasn’t proven to be a buy option, so start assembling a diverse group of high-quality NYSE dividend companies as they move lower in price. I start shopping 20% below the 52-week water limit and the shelves are full.
3. Don’t accumulate the “smart money” you accumulated during the last rally, and don’t look back and get excited because you may buy some shows too early. There are no crystal balls and no place to look back at the investment strategy.
4. Look to the future. No, you can’t know when the rally will come or how long it will last. If you buy quality stocks now (as you certainly could be), you will be able to like the rally even more than last time … by taking another round of winnings. Smiles widen with each new profit, especially when most people are still scratching.
5. As (or if) the adjustment continues, buy slower, as opposed to faster, and establish new items incompletely. I hope for a short and steep decline, but be prepared for a long one. There is more to shopping at The Gap than it seems at first glance.
6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed. You need to run out of money while the market is still adjusting. [It gets less and less scary each time.] As long as your cash flow continues without delay, the change in market value is just a perception.
7. Note that your working capital is still growing, despite falling prices, and check your holdings for opportunities to reduce the average share price or increase yields (for fixed income securities). Research both the basics and the price, rely on your experience and do not force the problem.
8. Identify new purchasing opportunities using a consistent set of rules, rallies, or adjustments. That way, you’ll always know which one you’re dealing with, no matter what the Wall Street propaganda mill spits out. Focus on stocks; it’s just easier, except it’s less risky and better for your peace of mind. Just think where you would be today if you had listened to this advice years ago …
9. Examine the effectiveness of your portfolio: with a clear focus on asset allocation and investment objectives; in terms of market and interest rate cycles, as opposed to calendar quarters (never do this) and years; and only by using the working capital model, because it allows for your personal asset allocation. Remember that there really is no single index number to use for comparison purposes with a properly designed portfolio of values.
10. Finally, ask your broker / advisor why your portfolio has not yet exceeded the levels you were proud of five years ago. If so, say thank you and continue with what you did. This is like golf, if you claim a better result than reality, you will end up losing money.
11. Another thought to consider. As long as everything falls apart, you have nothing to worry about.
Adjustments (of all types) will differ in depth and duration and both characteristics are clearly visible only in institutional class rear-view mirrors. The short and deep ones are the cutest (kind of like men, they tell me); long and slow ones are harder to handle. Most adjustments are “45s” (August and September ’05) and it is difficult to take advantage of mutual funds. But amid all this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally … its more popular downside. So smile through the drum Every day of the correction, you can just meet Peggy Sue tomorrow.