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The 1 Rule to Follow Now

Look, the market's bouncing! Is the crisis over?

Not hardly. But you probably knew that.

While it's possible that last Friday's lows will stand as "the bottom," I suspect we'll be down in that neighborhood again before too long. No matter what the world's governments do to take pressure off the banks -- and as of this writing it looks like they are making real progress, finally -- we're in for a tough recession.

And that means more selling.

Institutions will continue to reduce leverage, and individual investors, particularly those nearing retirement, will take advantage of any rise in prices to lighten up on stocks. That means, as I said last week, that we're likely to see a series of false starts before the market gets a sustained recovery going in earnest.

In other words, this rally is probably a "false start." (I say probably, but what I really mean is "definitely, unless something really weird happens." Of course, right now, really weird is the new normal, so the usual caveats apply.)

So what do we do in the meantime?

Stick with rule No. 1
With luck, we won't see anything like last week's sustained eye-popping drops for a long time -- but it's entirely possible that we'll rally for a bit and go right back down very quickly. But no matter what, rule No. 1 still applies: Don't panic.

That rule has a number of corollaries:

  • Have a plan and stick to it. Whether your plan is "Buy 500 shares of Apple (Nasdaq: AAPL  ) if it dips under $100 again" or "move 10% of my portfolio gradually into bonds over the next month," stick with it. If developments lead you to rethink your plan, rethink it -- don't make any rash decisions out of fear.
  • Remember that you have time. Sudden upward leaps in stocks like Google (Nasdaq: GOOG  ) that are well-regarded but have been wildly oversold can cause panic, too -- nobody wants to miss the boat! But hold on a minute. Many successful traders will tell you, "Never do anything in the first half hour after the market opens," because that's when too many people make too many decisions based on emotion, and prices in that period can be all over the map. If your plan is "Buy Mosaic (NYSE: MOS  ) under $40" because you've done the analysis and decided that that's what you're willing to pay, don't rush to buy it at $46 just because it's going up sharply. It could come back down -- and if it doesn't, there are plenty of other opportunities out there. Don't get too invested, emotionally speaking, in just one opportunity.
  • Plan your selling, too. I don't think any long-term investors should bail out of stocks altogether at this point -- it's too late for that -- but selling stocks like Abercrombie & Fitch (NYSE: ANF  ) that may be facing rough times to buy stocks like McDonald's (NYSE: MCD  ) that seem better-positioned is usually a good move. Or, you may have decided to lower your portfolio's overall risk by selling some stocks and moving into a bond index fund or other lower-volatility investment. But again, no matter what, sell when and because your reasoned judgment says it's the right thing to do, not out of emotion.
  • Don't obsess over the news. That's my job! Seriously, overexposure to attention-grabbing headlines and melodramatic TV talking heads will only feed your tendency to respond emotionally with impulsive trades. And that's bad. Unless you're a skilled, veteran trader who is prepared to make trading a full-time job, leave the quick trades on volatile issues like Validus Holdings (NYSE: VR  ) or Liberty Media Capital (Nasdaq: LCAPA  ) to others.

All of that said, there are tremendous opportunities out there -- if you're prepared to hold through the current storm with an eye to substantial gains a few years from now. If you're looking for strong ideas to buy today, take a look at the stocks that Fool co-founders David and Tom Gardner are recommending to members of their Motley Fool Stock Advisor service right now. Full access is free for 30 days.

Fool contributor John Rosevear thinks the global financial pond is so full of black swans at this point that it's hard to see the water. He owns shares of Apple. Google is a Rule Breakers pick and Apple is a Stock Advisor recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 13, 2008, at 10:05 PM, clanee1 wrote:

    This article was helpful for me, someone who doesn't know much about the market or how to invest. I will use this site as a resource as I begin to invest in the stock market.

  • Report this Comment On October 15, 2008, at 8:21 AM, vest0r2 wrote:

    I've seen more than enough red ink and want nothing to do with stocks until after the dollar crashes and the ashes cool.

  • Report this Comment On October 15, 2008, at 8:46 PM, macrophyllum wrote:

    Don't rely on the Fools. You should obsess about the news, alright maybe not obsess, but it is your responsibility to be informed.

    I pulled about 40k out of the market 3.5 weeks ago before the massive sell-offs because I started researching the Federal Reserve and how all we can do is be in a boom/bust cycle. It was quite obvious to me that the bust was about to begin--as it did. I recommend investing in *real* assets (e.g. gold or land). The wealthy are going to swoop up more of these real assets from the shrinking American middle class during this recession; its been happening for centuries.

  • Report this Comment On October 16, 2008, at 12:48 AM, The1MAGE wrote:

    Wow, 2 people are not following this sage advice.

    macro - you luckily got out before the drop, and now is the time to get back in as the fire sale is going on. (Actually buy back in slowly, as you can take advantage if the market falls even further.)

    Land (assuming developed land) is not a bad deal, if you know what your doing. But gold will be the next bubble to fail. Maybe not until the market panic slows, but it will plunge. (Way overvalued, you'd think it was a tulip or something.)

    I just tell everyone don't be one of the lemmings. Be intelligent, and you can actually make money off of this.

  • Report this Comment On October 16, 2008, at 2:29 PM, catoismymotor wrote:

    I dig the tulip reference, The1mage.

    This column makes a lot of sense. It is important to breathe, do your homework, develop a plan of attack, plan for the long haul, know where the exists are and when to use them, and finally don't sweat the daily market "catastrophe" you see in the news. The evening news does not make money telling you about the new baby geese that hatched in the local petting zoo. Bad news sells diapers and soap. They want to scare the crap out of you so you will continue to watch in order to get your daily fix of doom and gloom.

    I am going to step out on a limb to suggest companies that are service oriented to a commodity that has been temporarily devalued. Some of my favorites have to do with deep ocean drilling for oil and natural gas deposits.

  • Report this Comment On October 20, 2008, at 12:18 AM, masturhu wrote:

    This panic is the best thing that could happen to long-term investors. I'm 20, and lost over 50% but I'm more experienced and adding to my position :).

  • Report this Comment On October 21, 2008, at 3:14 PM, liberty41 wrote:

    Number one rule to follow: Stay OUT!

    What if they freeze the markets tomorrow to "help" the system? They are already discussing it.

    You can't play a game where the rules keep changing.

    Read this:

    A six year old can understand it.

  • Report this Comment On October 22, 2008, at 10:19 AM, rv36116 wrote:

    Gold has value and silver has industrial value, so comparing a tulip to gold or any precious metal is like comparing your 12 year old honda accord to a classic mint condition corvette, because they're both overvalued cars, right?

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