QUESTION: Hi Paul- Hope you had a nice weekend. I was wondering how you advise your clients to stabilize their portfolios during a market correction or crash. Are there any general guidelines you can recommend? I recently moved 20% of my funds into bonds which have been stable and growing. Also 50% of my portfolio is now in a cash holding after selling a week ago. i was planning to rebalance but decided to hold due to the current volatility. Would you recommend putting more into bonds, sectors, inverse ETFs right now? Of course if the market really bottoms out i would want to dump as much as i can into stocks :) im just reluctant to pull the trigger just yet since it seems theres no end in sight. Appreciate any feedback
It sounds like your timing was excellent. So the question becomes how to allocate back from cash and bonds into stocks.
Timing the bottom of the market is incredibly difficult, probably impossible. Anyone who actually gets it right at the bottom is very lucky indeed. Professionals spend their lives doing this, and the unfortunate truth is that most professionals underperform the market averages.
So how to allocate back into stocks? I would suggest dollar cost averaging. I would suggest starting now, the markets are so far up big today. Does that mark the bottom? I don't know, it could, or there could be additional bad days ahead. If you dollar cost average over a few months, and move your cash and bonds back into stocks a little at a time (perhaps a small amount once per week), you spread out your risk. Your average cost per share will ultimately be lower than the market, when things do bounce back.
If stocks continue to fall, you can take comfort that you will be buying stocks at lower prices. If stocks begin to rise, you will have a strategy to get back in on a constant basis.
Corrections can come quickly. The markets took big hits the past week, but recoveries can happen just as quickly. I do suggest that if you wait until the markets are for sure finished with the pull back, it will be too late and you will miss increases that can happen fast.
The answer to this is to invest back into stocks a bit at a time.
I hope this helps,
---------- FOLLOW-UP ----------
QUESTION: Hi Paul- apologies for the delay. Rough week :) Thanks for the info and I will definitely be following your advice.
So you think Apple stock will shoot up Tuesday after they announce their earnings? I just bought a bunch of shares while they are still cheap
Hope all is well Paul. thanks and have a nice weekend
Thanks for the follow up!
The only real way to play with stocks that have pending earnings releases is if you feel that you know something, or have a better feel for what the announcement will be, than everyone else. The expected earnings announcement is already built into the stock price, investors (individuals and institutional investors) account for that when they buy and sell the stock in the months leading up to the earnings announcement.
So the only way to play this would be if you feel strongly that the company will beat, or fall short of expectations. So, you have to look at if other investors have already calculated in a strong earnings announcement.
To sum up, the goal is to look for unexpected results. If everyone is already anticipating a strong earnings announcement, its already built into the price.
Also, I would suggest that AAPl's current stock price is expensive, not cheap. It is about at all time high's, so tough argument to make that the stock is cheap. But, AAPL does have many years of history showing it can continually make new highs.
Trading around earnings announcements is tough, its something my research company is not focused on, so thats the best I can offer. I do wish you well, even if the trade does not go as you hope, AAPL is probably a good longer term investment. So if you don't make money on the earnings announcement, it will likely come down the line.