Bracing for a Double Dip

This year's volatility appears to have grounded a good many of Wall Street's big boys. In fact, companies such as Pfizer (NYSE: PFE  ) , IBM (NYSE: IBM  ) , and Coca-Cola (NYSE: KO  ) trade at levels well off their respective 52-week highs. PepsiCo (NYSE: PEP  ) and Hewlett-Packard (NYSE: HPQ  ) fit that profile, too, as do Oracle (Nasdaq: ORCL  ) and ConocoPhillips (NYSE: COP  ) .

Appearances can be deceiving
I say "appears to" because there may be plenty of room for all of the above -- and the broader market in general -- to fall further. As anyone who lived through the bursting of the Internet bubble and the "tech wreck" of 2000 can tell you, market trends have a bad habit of persisting well past the point at which valuation reality would seem to provide a safety net. Just ask investors in S&P-tracking stalwart Vanguard 500 Index (VFINX). A loss of 9% in 2000 was followed by a 12% decline in 2001. Then in 2002, the fund shed more than 22% of its value.

So what are the options for investors contemplating the possibility of a market "double" or perhaps even a "triple" dip? Good question. Here are three possibilities.

1. Double down
Investors with a stomach for volatility and a lengthy timeline might consider plowing fresh dollars into their portfolio's brightest prospects. After all, if you've done your homework, Mr. Market's fire sales provide choice opportunities to snap up shares on the cheap, right?

Could be, yes -- but then again, maybe not. Even apparently bulletproof stocks can inflict further damage to a portfolio when the market refuses to behave rationally -- as it's been known to do on occasion. For that reason, doubling down isn't my preferred option during downturns.

2. Head for the hills
Pulling your money out of the market might seem to be the safest tack, but that can be a money-loser, too: Inflation will erode your purchasing power year-in and year-out. And of course, when the market resumes its upward trajectory, you'll miss out on that opportunity.

The bottom line: Playing it "safe" carries risk, too. With that in mind, I think savvy types should carefully consider this third option.

3. Automate your retirement prep
If you have an asset-allocation game plan in place -- a road map to your financial future built around your timeline and tolerance for risk -- downturns provide opportunities to take advantage of dips (and even double dips) through dollar-cost averaging. Doing so can smooth your ride to retirement bliss, but -- and here's the catch -- only if you've done your homework. Unless you've assembled a basket of securities into a carefully calibrated portfolio -- one that suits your risk tolerance and timeline -- you might be throwing good money after bad.

The Foolish final word
Bottom line: Dollar-cost averaging is only as effective as the vehicle you're sending your monthly moola to. And with thousands of funds, stocks, and exchange-traded funds (ETFs) vying for your hard-earned dollars -- and with most of 'em duds -- choosing well can sometimes seem like a needle-in-the-haystack exercise.

Not to worry. We've found the needles for you and threaded them through a service called Ready Made Millionaire. RMM features a compact, real-money portfolio -- the Fool has a million dollars on the line, in fact -- and it's designed for busy folks in search of a set-and-forget lineup they can use to feather their nest egg.

The service will reopen early next year, but to tide folks over until then, we're offering a special free report -- The 11-Minute Millionaire -- that highlights the three things you need to know before investing another dime in this market. Click here to learn more about Ready-Made Millionaire and snag your free copy of our report.

This article was originally published Aug. 14, 2007. It has been updated.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire investment service. Pfizer is a Motley Fool Income Investor pick. Pfizer and Coca-Cola are Motley Fool Inside Value selections. The Fool owns shares of Pfizer. You can check out the Fool's strict disclosure policy right here.

Read/Post Comments (4) | Recommend This Article (11)

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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 December 14, 2008, at 7:49 PM, rays266 wrote:

    Is this the bottom? Probably the easiest measure of the markets bottom are the unemployment numbers.

    We are currently at the 2002 lows, but the latest numbers over the last 2 months have brought us to the 1983 levels, thus a lower market. How low? After the double tops of 1906 -1914, 1916 - 1921, 1972 - 1974 the market corrected 40% to 50% each time.

    That should leave us somewhere between 8,500 - 7100. Get ready to double down soon.

  • Report this Comment On December 15, 2008, at 3:01 AM, Brettze wrote:

    Some of us even shorted against our own stocks when we think we are heading for a downside . With the profit from the short, we bought more stocks at lower prices. there is no law against long and short positions in same stock, anyhow.. The reason is why sell if you can short , too. If you erred, you still have the profit on the long and you can still short more at higher prices before the downsides .. this is called hedging.. It is ok if you borrowed your own stock for short but my shares?? no way!

  • Report this Comment On December 15, 2008, at 9:02 AM, treeman102 wrote:

    Brettze- go take your meds

  • Report this Comment On December 15, 2008, at 10:07 AM, TenIronRoss wrote:

    In my opinio, oil is at or near the bottom, Canadian oil trusts are the place to be for the income investor.

    Many of their distributions (dividends) are above 20% on current prices. The 15% Canadian withholding tax is recoverable as a foreign tax credit.

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