Since the world often times can be seen as half full, and most investors in the stock market are in it for the more optimistic aspect, it is good to look at the half empty. The market has gone up and the bull market is still going forward. Tom Stanley of Steadyhand Investment Funds wrote a column called Don’t be caught off guard when the bear comes knocking. In the article he recommends you examine your portfolio paying attention what if the markets were to fall:

Down markets are never quiet and are guaranteed to feel lousy. If the downturn is severe than nothing will escape the fall and there will be little attention paid to valuations. Downturns turn people into survival mode.

When markets are down, everyone becomes an economist. Peter Bernstein said in calmer moments, recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm they become remarkably bold in their predictions.

With this big picture focus becomes a shorter time frame. Investors feel the need to be more exact in timing purchases, transfers and withdrawals. This precision has the effect of freezing many people preventing them from taking positive action.

You need to get prepared for next downturn

1. Have a good sense of what you want your long-term asset mix to be (cash, stocks, bonds). This will give you a baseline to work with.
2. Mentally rehearse what you are going to do if the portfolio falls 10 to 15%.
3. Freshen up your target list for securities and funds you want to purchase or add to. (this might be your most important piece of homework – A downturn will push prices down, some stocks there will be buying opportunities)
4. Know who you will lean on.

Linking to dividend paying stocks, if you are a long-term stock holder, downturns are part of the business and this is where you can buy great quality stocks at lower prices and eventually they will go lead the market upwards. If they pay a dividend you can do very well (the last downturn some people borrowed money to buy stocks and the dividends covered the interest cost. The stocks went up and the loans were paid off). The key is which stock would you pick and for that you need to do homework on which are the best stocks to buy.

There are more questions than answers, till the next time – to raising questions.