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The past several weeks have probably left most investors licking their wounds and scratching their heads, attempting to make some semblance of sense out of the market (not to mention their portfolios' precipitous declines). In many ways, it seems investors' future expectations have shifted dramatically. And since those future expectations appear quite bearish, the markets have been throwing a temper tantrum of their own. It seems we all need an intelligent way forward. Below, I hope you'll find some much-needed advice to help you better position your portfolio for the long haul.
The last week alone produced enough news to age investors beyond their years. According to credit rating agency Standard & Poor's, the United States now carries greater risk to lenders than at any time since credit risk became a metric. The market then proceeded to positively fall off a cliff on Monday, recording some of its ugliest hours since the post-Lehman bankruptcy death nosedive.
Investors need to develop some kind of sensible game plan to not only survive, but to actually benefit from Mr. Market's schizophrenia. Before panicking or acting rashly, consider the following advice. It could make all the difference for your portfolio's future.
The oft-quoted Warren Buffett once implored investors: "Be fearful when others are greedy, and be greedy when others are fearful." The recent glut of negative economic data has investors panicking at the growing possibility of a double-dip recession. Times like right now, where fear starts to drive selling, represent the perfect opportunity for more clear-headed investors to start looking for intriguing opportunities.
Intrepid investors have a number of key inherent advantages by utilizing this "fish where others won't" approach. Fewer investors present often means less competition, which can lead to certain stocks being overlooked and -- hopefully -- underpriced. Consider industrial powers Terex (NYSE: TEX ) and Manitowoc (NYSE: MTW ) , both of which issued lackluster quarterly results recently. Manitowoc missed Wall Street estimates by $0.02 but had double-digit revenue growth in its most recent quarter. Since July 20, its stock is down more that 40%. Terex missed analysts' estimates as well but also grew its top line. The market has since shaved more than 35% off of its share price since July 20. Seem justified to you?
Maintain a long-term perspective
Here at The Fool, we invest for the long-term. We also look at stocks as shares of real businesses, not just pieces of paper. We realize markets typically operate at some degree of sub-optimal efficiency. Anyone that disagrees should look at the last three days' trading activity. However, these wild swings create tremendous opportunities to buy into your favorite companies at levels below their actual worth. Since we feel confident the market will recognize its error over time, holding onto those once-cheap shares as the market recognizes their true value can generate some healthy and relatively easy profits.
Buy as prices decline -- and don't try to call the bottom
Unfortunately, investors have to navigate the markets without perfect information. We'd all like to only pay the single lowest price we can for a stock, of course. However, in the absence of your crystal ball, you'll never see a stock price reach that point until it becomes too late. If you find a stock you like for the long-term, you can start slowly purchasing it as its price decreases. The automakers come to mind here. Despite the fact that the "Detroit renaissance" appears to be in full swing, the market has punished the shares of the now-thriving automobile manufactures. Despite healthy quarters, Ford (NYSE: F ) and General Motors (NYSE: GM ) now cost 15% less than they did three weeks ago (as of trading today). Never mind both these companies actually made money.
Buying moderately on the way down will help to drive your overall price basis to a lower point. That way, when the stock price starts to recover, you've already established your position. From there, it gets pretty easy. Sit back and watch that stock price rise.
Remember: Everything else being equal, cheaper is always better.
Foolish bottom line
I don't know what the future holds. However, I do know that a share of the same companies I liked at the start of July will cost me between 15 to 20% less now. And while I think the U.S. and global economies have a lot of messes to clean up, I feel confident they eventually will. Balance sheet recessions typically require a decent amount of time before a proper recovery ensues. Homeowners need to regain their financial foothold, companies need to begin to invest, and the housing market needs to work through a glut of excess inventory before a real recover will occur.
And if the recent bearishness has you spooked, The Motley Fool has another valuable resource for you: a special report detailing the actions you should take before the market gets worse. It's completely free to access. Just click here to get your free copy today.