Dealing With Market Rallies: Ten Do’s & Don’ts

Anytime now, the Wall Street “Pronounceticators” (sic) will alert you to the obvious: The Rally is coming! The Rally is coming! You’ll see the normal charts, figures, rationales, and estimations. All designed to make you feel safe again and to encourage you to run out there and buy the stock market, particularly those issues and funds that have surged ahead faster than their not quite as wonderful competitors. Please step back and think a minute. You are being asked to ignore the even more obvious: mainstream Wall Street is still trying to catch up to levels it achieved around March of 2000!

So here’s a list of ten things to do and/or to think about right now to protect yourself more than you did the last time… remember?

1. Your present Asset Allocation should have been tuned in to your goals and objectives. Resist the urge to increase your Equity allocation because you expect a rise in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible.
2. Take a look at the past. There has never been a rally that has not succumbed to the next correction, so set reasonable profit taking targets and pull the trigger.
3. After taking a profit, don’t look back and get yourself agitated. There’s no such thing as a bad profit, and no place for hindsight in an investment program.
4. Take a look at the future. Nope, you can’t tell when the correction will come or how long it will last. If you are taking profits now (as you certainly should be) you will be able to love the correction as much as you’ve loved the rally.
5. As (or if) the rally continues, sell more quickly as opposed to less quickly, and establish new positions slowly and incompletely. Hope for a short and steep decline.
6. Understand and embrace the Smart Cash concept, an integral part of The Investor’s Creed. (Yeah, I want you to look up those concepts. They are in The Brainwashing of the American Investor.)
7. Since your portfolio is at, or very close to, an All Time High (net) Value Level, examine your holdings to cull the weakest position now, while it will be least painful. Examine both fundamentals and price, giving significantly more weight to the former. Don’t force the issue.
8. Identify new positions using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. (Boy would that have helped you out six years ago!) This Watchlist Program does it for you, but only if you are interested in Value Stocks.
9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows for your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.
10. Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you record a better score than the reality, you’ll eventually lose money.

Just for the record, value investors have been experiencing a rally for the past five and a half years, with new all time highs achieved on a regular basis throughout. It is estimated that a typical portfolio of individual securities (with an Asset Allocation of 70% to Equities and 30% to either taxable or tax exempt Fixed Income) could have grown by no less than 50% during this time frame. There certainly does not seem to be any reason (in my less than humble opinion) for any investor to be satisfied with “break even” or less during this time frame.

Steve Selengut
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800-245-0494
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"The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read"