This year's volatility appears to have grounded many of Wall Street's big boys. Even such seeming stalwarts as ConocoPhillips (NYSE:COP), IBM (NYSE:IBM), and Intel (NASDAQ:INTC) have posted double-digit losses through yesterday’s market close.
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 dip," or perhaps even a triple? 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?
Maybe so, or 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. Indeed, the likes of Merck (NYSE:MRK) and Nokia (NYSE:NOK) -- a pair of nicely profitable free cash flow cows -- have swooned below the broader market’s woeful yearly showing. With those examples in mind, 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: Over time, inflation will erode your purchasing power. And of course, when the market resumes its upward trajectory, you'll miss out on that opportunity. That’s exactly what happened to shareholders of Genentech (NYSE:DNA) and Apple (NASDAQ:AAPL) who sold at a major loss in 2002, before those stocks rebounded.
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
Dollar-cost averaging is only as effective as the vehicle to which you're sending your monthly moola. And with thousands of funds, stocks, and exchange-traded funds (ETFs) vying for your hard-earned dollars -- most of 'em duds -- choosing well can sometimes seem like a needle-in-the-haystack exercise.
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The service will reopen to new members soon, 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. Apple is a Stock Advisor recommendation. Nokia and Intel are Inside Value picks. The Fool owns covered calls on Intel. You can check out the Fool's strict disclosure policy right here.
