We all know the stock market is highly unpredictable, especially in the short run. However, we also know that the market is subject to periodic large moves, either up or down.
Even though we know the stock market is setting itself up for a big move, we don't know with any confidence when it will happen.
Big moves in the stock market averages happen on the upside and the downside. So, it pays for investors to have a plan in place to react (or better still, proactive before the event).
When stocks are depressed for an extended period, it is reasonable to assume the stock market will begin attracting buyers with the bargains available and prices will rise – sometime dramatically.
Likewise, when stocks have been on an extended upward track, look for investors to begin taking profits (selling), which will force the price of stocks down.
For many investors, the best strategy is to keep a consistent balance of stocks, bonds and cash and ride out the ups and downs.
However, other investors nearing the time when they may need to cash out of stocks to meet a financial goal (retirement, college and so on) should have an exit plan.
Other investors may be sitting on a pile of cash and want to get back into the market. When stocks are depressed is a good time for buyers to go shopping for bargains.
There is no one strategy that fits every investor's financial goals, tolerance for risk and other concerns. You will need to construct your own, preferably well in advance of needing to execute.
This may mean setting goals for selling and for buying. That is, when will you sell your winners and when will you buy the bargains. Like any disaster plan, this works better when you are not under pressure to react to a big stock market event.
