Avoiding a bear trap
As markets begin to emerge from a slump, it's tempting to unload shares if you think the rally is temporary. But first, you need to answer three questions:
- What's the state of the overall economy? Is it improving or worsening?
- Are consumers spending more or less money?
- How are corporate profits looking? Better? Worse?
Obviously, people will have different views on the state of the economy, and even experts can send out mixed signals. There's a reason why many people refer to "two-handed economists" because, on the one hand, some indicators might look promising; on the other hand, the economy might be tanking hard any moment.
If the economy is worsening, a market recovery is likely to be short-lived. If indicators are improving, you might be witnessing the beginning of a bull market. It's hard to tell sometimes, but the best approach is to be consistent with a long-term strategy that relies on dollar-cost averaging and consistent contributions to a diversified portfolio to smooth out any bumps on your way to financial security.
Trying to time the market is a fool's errand; a buy-and-hold strategy is a Foolish recommendation.
