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10

A Winning Plan for Any Market

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With all the crazy moves the market has made lately, it's no wonder that so many people are confused about where stocks will go next. But rather than spending a lot of time and effort trying to guess the market's next zig, you're far better off following a plan that will work no matter where stocks go in the coming weeks and months.

No timing beats bad timing
The last two years have brought market moves that have left many investors completely shellshocked. Even though people thought they understood the risks involved with investing in stocks, the reality of the plunge that lopped off more than half of the S&P 500's value between late 2007 and early 2009 scared a lot of investors completely out of the market.

Since then, the market has caromed wildly between awe-inspiring rallies and stomach-churning drops that brought back memories of the worst days of the financial crisis. On the whole, though, stocks have earned back a big chunk of what they lost. Yet unfortunately, it's only now, after such huge gains have already been made, that many investors are starting to feel comfortable getting back into the stock market again. Although stocks may yet continue to rise from here, there are no guarantees -- and all too often in the past, the general public has piled back into an investment at exactly the wrong time.

Stop guessing and invest!
The worst thing about the dilemma that those who are still on the sidelines face is that they've gotten themselves sidetracked from a winning strategy. It's true that the market averages over the past 10 years haven't performed well, leaving many to conclude that long-term investing is only for suckers. But if you followed these three steps, you still made money over the long haul -- even in the lousiest period for stocks in generations.

1. Keep investing, no matter what the market does.
When stocks fall, your gut tells you to stop putting more money into the market. After all, throwing good money after bad feels like exactly the wrong move.

But your experience back in early 2009 should show you just how wrong your gut is when it comes to investing at market bottoms. For instance, Sirius XM Radio (Nasdaq: SIRI  ) and JDS Uniphase (Nasdaq: JDSU  ) both looked like they might turn into complete losses for investors, as Sirius looked bankruptcy-bound and JDS saw its free cash flow evaporate. Yet those who not only held on but also added new money to pick up shares on the cheap benefited the most from the huge rebounds that followed. Even less aggressive investors who simply bought index funds reaped the rewards of buying stock at the lows.

2. Stick with a solid core.
You don't have to be a daredevil to be a winning stock investor. Even though the bankruptcy-defying exploits of Ford Motor (NYSE: F  ) have turned the carmaker's stock into a stellar performer since early 2009, lower-risk stocks didn't fall so far in the first place.

For instance, it's been a very long time since anyone could say that Wal-Mart (NYSE: WMT  ) or McDonald's (NYSE: MCD  ) were high-growth powerhouse stocks. In their maturity, some would say that their best days are behind them, and they're unlikely to post the triple-digit gains that smaller stocks often sport.

Yet those two stocks were among the few to hold their ground in 2008. And even though they didn't rise as far as the big rebounders did in 2009, their aggregate return over those two years would make many investors jealous. Having a core of solid stocks like these won't always protect you from losses, but they will make the market's big bumps a little less scary.

3. Add some spice to your life.
Another thing that a solid core does is give you latitude to take some risk with a portion of your portfolio. One idea is to take 10% or so of your money and use it for risky individual stock ideas that you wouldn't want to make a bigger bet on.

What those ideas are depends a lot on your own inclination and expertise. Those who believe that the recent rise in precious metals is just the tip of the coming iceberg might put money into silver-streamer Silver Wheaton (NYSE: SLW  ) , which has acted as a leveraged play on the price of the white metal. Those who instead prefer the binary results of biotech stocks could look at Orexigen Therapeutics (Nasdaq: OREX  ) , whose Contrave obesity drug goes before the FDA in December.

Stay smart
No matter what you choose to invest in, having a long-term strategy is essential to avoid costly trading mistakes. Having the discipline to keep investing even during rocky periods can mean the difference between making money and treading water.

ETFs make it easy to set up a winning investment plan. To learn about some great ETFs that belong in your portfolio, click here to get The Motley Fool's free report, 3 ETFs Set to Soar During the Recovery.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger prefers winners. He doesn't own shares of the companies mentioned in this article. Ford Motor is a Motley Fool Stock Advisor pick. The Fool owns shares of Wal-Mart, which is a Motley Fool Inside Value recommendation and a Motley Fool Global Gains choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy pulls victory from the jaws of defeat.


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  • Report this Comment On November 08, 2010, at 10:33 AM, pete163 wrote:

    I have tried all this, twice. This is worse than Vegas crap tables. My self alone have been drop to the floor and kicked across the room a dozen times. Don't tell me about buy and hold, thats a load of dune. Here are what we are up agents! The shorts- The naked shorts- margin dumpers- option sellers- FTC power- I can go on with over 25 thing that says, look out and i'm still trying so don't talk Fool stuff here.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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