This is it. It's what we've all been dreading. It's the market downturn.
Investors have been worried about high energy prices, rising interest rates, terrorism, the housing bubble, and the apocalyptic ramifications of Brangelina for years now, but somehow the market kept rising. No more.
Since the beginning of May, the S&P 500 (AMEX:SPY) has shed nearly 5% of its value, the Nasdaq 100 (NASDAQ:QQQQ) is down nearly 8%, and the small-cap Russell 2000 index is off nearly 10%. It looks like Brangelina finally took its toll.
Cope with the market
How have I handled these substantial losses? I've cried myself to sleep. (Just kidding.) Actually, I've tried to take them all in stride.
See, the market and I came to terms with one another a long time ago. Sometimes it would love me, and sometimes it would hate me. But I learned a secret along the way from great investing masters like Buffett, Munger, Lynch, and Weitz: The market always comes around. And the times when the market hates you most can actually be the best times to show it how much you love it -- by buying stocks.
What the hell are you talking about?
Maybe I'm going a little overboard with the love/hate analogy. It's not like the market has those words tattooed on its knuckles. But what I'm trying to say is that the market is inconstant. As it moves up, it drops without warning along the way.
These drops are painful, disheartening, and full of opportunity.
Three steps to make peace with the market
Here are a few ways to proceed in this uncertain economic environment:
- Don't panic.
- Assess your risk tolerance.
- Allocate your assets accordingly.
Just because the market has dropped doesn't mean you should sell. Rather, take a step back and examine your portfolio.
Are you too heavily concentrated in speculative growth stocks such as SunPower (NASDAQ:SPWR) and Sun Microsystems (NASDAQ:SUNW), which are heavy on potential but low on profits? If you're worried these stocks could suffer badly because of Brangelina (or rising interest rates ... or whatever), sell a bit and balance your portfolio in a way that leaves you comfortable with your risk level. You can keep the proceeds from those sales on the sidelines, or you can reallocate that cash to other assets.
I want to reallocate, but where?
When the market starts crushing stocks indiscriminately, it's a good time to look for the best-positioned and best-managed operators whose stock charts have temporarily turned down. These companies have the financial strength to survive adversity and the stock prices that make now a good time to buy -- and hold.
Garmin (NASDAQ:GRMN) is an example of this type of category-killing company. The unchallenged leader in GPS technology, Garmin trades at a reasonable price, boasts stellar growth, and can point to a balance sheet with more than $360 million in cash and no debt. And with deals with companies as diverse as XM Satellite Radio (NASDAQ:XMSR) and Harley-Davidson (NYSE:HDI), the future for the company looks bright. Fool co-founder David Gardner recommended Garmin in his Motley Fool Stock Advisor service because it's the kind of company he's willing to hold through market downturns. These types of companies can actually have investors cheering for downturns, because they can scoop up shares at a cheaper price.
But if Garmin isn't for you, David and his brother Tom offer nearly 100 diverse recommendations and timely updates to help you build a better portfolio. If you'd like to learn more about our Stock Advisor service, click here. You can try it free for 30 days and determine if David and Tom can help you cash in on this market while others are cashing out.
Tim Hanson does not own shares of any company mentioned in this article. XM Satellite Radio is a Rule Breakers recommendation. No Fool is too cool for disclosure.
