- When a bull market is in progress, understand that these don't last forever. Many make the mistake of buying high on the basis of infomercials and because friends tell them how well their investments are doing. Do the opposite and take profits. Lighten up on your holdings and don't let greed be the determinant of your decision. Trade if you wish, but only with your profits and always with a stop-loss order to back your purchases. Accumulate cash but don't borrow.
- Before a bear market is declared, many pundits will be warning that markets are over-bought. You won't know for sure until it's there already. Interest rate increases and monetary tightening are some of the early signs. Fast-growing economies will begin to experience slower growth. Production, consumption, trade, real estate sales and prices will soften. Some companies will report lesser revenues and profits. Begin to invest 10 percent to 20 percent of your available funds into defensive stocks, such as utilities and health-related stocks.
- Market bottoms are difficult to catch but, with enough funds, there is nothing wrong with averaging down over several months. Don't invest everything all at once, even if you think the bottom has been reached. Invest 10 percent to 20 percent at each major dip as false bottoms appear and re-appear. If the real bottom is finally reached and you still have funds, you can still get good prices on the way up. Remember that some industries and companies come down more and faster than others. Companies that anticipate hard times cut costs and perform better than others.
- The start of a recovery is the safer time to buy, although not as profitable as buying at the bottom. Green shoots are the initial signs of a recovery. Amid dimmer expectations, interest rates come down. As inventories get depleted, manufacturers start producing more. Earnings and economic data start looking better than anticipated, but doubts remain as signals come mixed. Declines in stock prices level off somewhat. Continue to purchase even up to 50 percent of funds but stick to the blue-chips that you can keep in case the downturn resumes.
- Consumer confidence builds up in consumer-driven economies. Export-driven economies stock up to take advantage. Companies start reporting more revenues. Stock markets perk up with higher volumes and prices. Production accelerates and so does trade. More investors come in. Purchase stocks at every major dip and diversify as you get fully invested. Invest in one or two stocks with potential for higher growth even if these are not blue-chips.
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