How to Use a Stock Market Decline to Your Advantage

March 2nd, 2007 • Related • Filed Under • by admin

Near the end of last year investors were very happy with their positions in the market. The Dow Jones Industrial average hit a series of new all time highs and the market seemed to be at the top. I recalled back about seven years and remembered the last time I heard statements like that. It was in the beginning of 2000, right before the dotcom crash. The stock market was heating up fast, and it was only a matter of time before the first major sell off and a bear market for the next couple of years.

It did happen then, and there’s a pretty good chance it’ll happen again now. In the last week, the Dow Jones Industrial average lost nearly 500 points and chances are the market will be seeing a downward trend for the next couple of years. This is nowhere near certain there’s no way that I have any unique insight over any other investors, but let’s assume that the market is going to see a downward trend in the next couple of years, how can we take advantage of this?

The most important thing in a market like this is to get out while the market is still near the top. Over a long period of time the stock market will trend upwards and you’ll probably make all of your money back in about 5 years anyway, but if you were to sell right before a decline and then buy back in when the market hits the bottom, and then enjoy all the upward growth again, you could potentially have some very good returns. If you do believe that the market is declining, you might consider moving your investments to a cash position, such as a money market fund.

Some people suggest that you go short positions so that you could actually make money should the market drop, but this is really a very risky game to play. You’re not sure at all what the market’s going to do on a short term basis, just that the market is probably going to go down for the next couple of years. If you choose to move your money into a solid investment such as a Certificate of Deposit or a Money Market Account for the next couple of years, you are guaranteeing that you’ll have all your money and be slightly ahead of inflation. This isn’t a bad move to make when the market’s at an all time high and you could potentially lose a decent amount of money in the next couple of years.

Definitely do your own research and thoroughly examine any investment before making it. No one can say for sure that the market is going to go down in the next couple of years, but all of the normal precursors appear to be happening. If you do believe this is the case, moving to a cash position now and buying in again at the bottom a couple of years from now could be a very lucrative thing to do.