A DISCIPLINED APPROACH FOR INVESTING IN A FALLING MARKET

Posted on by Joseph M. Brennan Jr.

There is opportunity no matter what happens in the stock market. One of the worst things you can be as an investor is an emotional investor. So, try to get your emotions out of it and execute with a sense of discipline.   Fortunately for me, I’m still strongly in positive territory for 2020 which is not bad given that the overall stock market has taken quite a tumble.

Over the past year I’ve been employing my stock market correction strategy which involves shorting the overall stock market and selling periodic gains and repeating this (I used the UVXY to short the market).  

At the beginning of March, I switched things up and started using my bear market strategy which involves buying into the stock market a little at a time, selling significant rallies, and then continuing to buy into the stock market until it appears to go through a bottoming process. I first developed this strategy after the 2000-2002 dot com bubble. I lost a lot of money then (as most people did).   My first use of this strategy was during the 2007-2009 financial crisis and I did much better than I did during the dot com bubble. Since then I have refined it a bit more. We’ll see how well it works this time. Hopefully, the refinements will allow me to do even better this time than I did during the financial crisis.

To be a successful investor you have to evolve and adjust your approaches over time. Because, no matter what happens, there are lessons to be learned and ways to improve performance.   The reason I developed this bear market strategy is because once the overall stock market loses a significant percentage of its value, it takes a much larger gain to break even. Consider the following set of loss/gain percentage pairs. If from peak to trough the stock market (or individual stocks for that matter):  

  • loses 20%, then it has to gain 25% to break even
  • loses 25%, then it has to gain 33.3% to break even
  • loses 33%, then it has to gain 50% to break even
  • loses 50%, then it has to gain 100% to break even
  • loses 75%, then it has to gain 300% to break even

So, it helps to have a loss mitigation strategy in your stock market investing toolbox.   Another disciplined approach I’ve used as a loss mitigation strategy involves the following:  

  •  Case #1: If a majority of my investment account is invested in the stock market, I ask myself, based on where the overall stock market is right now (e.g., the S&P 500 Index is what I frequently use), what is the probability of the next 10%+ move in the stock market being down? If I assign a 15% probability of this happening (which means I think there’s an 85% probability of the stock market going up by this much), then I adjust my investment account such that 15% of it is in cash (or other low risk alternatives).
  • Case #2: If a majority of my investment account has been cashed out, I ask myself the opposite: based on where the overall stock market is right now (e.g., the S&P 500 Index), what is the probability of the next 10%+ move in the stock market being up? If I assign a 20% probability of this happening (which means I think there’s an 80% probability of the stock market going down by this much), then I adjust my investment account such that 20% is invested (and 80% remains in cash or other low risk alternatives). I invest in individual stocks, index funds, and other stock alternatives at times. Index funds tend to move with the market indexes they track while individual stocks tend to exaggerate the moves higher or lower by the market indexes.
  • Case #3: If my investment account is only 50% invested in the stock market, then I ask myself: based on where the overall stock market is right now (e.g., the S&P 500 Index), is it more likely for the next 10%+ move in the stock market to be up (Case #2 above) or down (Case #1 above)? I then assign a probability and make adjustments to my investment account accordingly as shown above.

 It’s not easy assigning probabilities (and being right), so many people might be tempted to just stay put. However, you should at least be mindful of the appropriate risk you should be taking given where you are today. If you are a long way from reaching your financial goal, then a majority of your investment account should be invested in the stock market for much of the time (Case #1 above). If you are close to reaching your financial goal, then a majority of your investment account should be cashed out or invested in low risk alternatives for much of the time (Case #2 above).  

You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing (https://brighterdayslifecoaching.com/published-books-and-life-coaching-services/).

Make it your goal to learn these investment techniques so that you can progress towards achieving the financial freedom and independence you’ve always dreamed of.

#stocks #investing #stockmarket #success