Here is a great article by Ken Faulkenberry. You can read the original article HERE.
It is almost impossible for the average investor to buck an extreme stock market trend. The media and the markets have a way of bringing the greed out in us at market tops and placing the fear in us as the market falls. If this were not true we would not have the public consistently buying market tops and selling market bottoms. Avoiding this mistake is a benefit of subscribing to an asset allocation guide.
Remember if you lose 50% and gain 50% you have an average return of 0% but you are not at break even. You have lost 25% of your portfolio. Think about it, if you have $100 and lose 50%, you only have $50 now. If you gain 50% now you only have $75 despite the fact you “averaged” 0%.
This is how the media and investment funds fool people. Very few investors achieve even average returns because they don’t understand how volatility kills portfolio performance. You must focus on not losing money and lowering your portfolio volatility.
Current Stock Market Trend
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What is the current stock market trend? Could we be in the middle of a bull market or finishing a triple bear market top? As an investor you need to recognize the signs and analyze the probabilities of each scenario.
If we are in the middle of a bull market we should find conditions that will support and fuel the market higher in the long run. These might include corporate insider buying, investor skepticism, plenty of cash in equity mutual funds, risk aversion, rising stock market volume, rising commodity prices, low margin debt, etc. In general, there would be many investors who were not “all in” yet; they provide the “fuel” to propel the market higher going forward.
If we are at a triple bear market top we should find conditions that demonstrate most investors have already bought into the rally. These might include low mutual fund cash levels, an embracing of risk, falling stock market volume, falling commodity prices, high margin debt, market exuberance, etc. In general you will find a supportive media and a culture that has embraced buying stocks.
Why is the Stock Market Trend Important?
If we are in the middle of a bull market you want to maintain a higher than average asset allocation to equities. You want to find as many stocks as you can that meet your valuation requirements. Sell stocks that become overvalued after strong rallies. Take advantage of market corrections to add stocks that decline and become bargains.
If the current stock market trend is ending in a triple bear market top your principal and returns are at serious risk. Remember, the biggest risk of investing is losing your principle. The mathematics of compounding returns favors a more conservative approach to capital preservation than the average investor employs.
At market tops, the supply/demand balance is about to change because most everyone that is going to buy has acted. This process can be frustrating because no one is able to predict exactly when the balance will tip. No one rings a bell at the top.
The question is where are we in the cycle of market emotions? Where do you think the media is in the cycle of emotions? The public typically splurges on stocks in the red zone (i.e. 1999-2000, 2007), and panics in the green zone (i.e. 2002, 2009).
Where are we today?
Asset allocation will determine 90% of investment portfolio returns. That makes it the most important decision you can make. Subscribers to the Arbor Investment Planner are kept abreast of current stock market trends, conditions, and analysis so they can make educated allocation decisions.
It takes willpower and patience to be a disciplined investor. If it were easy everyone would do it right. It’s not easy, and it’s the hardest at the very top and very bottom. Understanding the stock market trend and where we are in the cycle of market emotions can literally save your portfolio from devastating losses.
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