Published November 2002

Stock-market trends change
— so be prepared

By Eric Cumley
Columnist

Stock prices fluctuate every single day. And, over the course of months or years, the market, in general, cycles up and down. No one can really predict when a bear market will replace a bull market (or vice versa), but one thing is clear: Sooner or later, all stock-market trends change direction — and when that happens, you’ll definitely want to be ready.

Sadly, some investors make exactly the wrong moves during any given market trend. In the midst of long bull markets, some investors gain so much confidence that they keep pouring dollars into investments that have already soared to record highs. Conversely, prolonged bear markets can cause some investors to act in an unduly pessimistic manner — so much so, in fact, that they may head to the sidelines to wait for “better times.”

Of course, it’s not all that hard to understand these types of investment behaviors. When other investors are either gleefully snapping up stocks or hastily fleeing the market, you might feel pressured to do the same. After all, you may reason, these people can’t be wrong — they must know something. However, when masses of people decide it’s time to either buy or sell, their decisions are often based on greed, or fear, rather than rational analysis.

This type of emotional investing frequently leads to bad decision-making. For example, investors who jump out of a long bear market may end up missing the early stages of a recovery — and that’s often when the biggest gains are recorded. Unfortunately, neither you nor anyone else can pinpoint precisely when today’s bear market will become tomorrow’s bull market.

But even if you don’t know exactly when one trend will end, you can still position yourself for the next one. How? By following some investment techniques that are valid during all types of markets. Here are a few ideas to consider:

• Stay invested — If you have a long-term time horizon, you need to stay invested all the time. If you pull out of the market when it has been down for a while, you won’t have your money in position to work for you when prices start going up again. Plus, good investment opportunities are often available in bear markets.
• Stay diversified — Even if you make no changes, your portfolio can become over-concentrated in a few areas if the value of a particular asset, or group of assets, rises or falls significantly during market run-ups or declines. When that happens, you may want to rebalance your portfolio so that it’s once again properly diversified and appropriate for your risk tolerance, your goals and your investment time horizon.
• Stay disciplined — Try to avoid “start and stop” investing. Instead, try putting the same amount, at regular intervals, into your investments (known as dollar cost averaging). In doing so, you’ll buy more shares of an investment when its price is lower, and fewer shares when its price goes back up. Although this technique won’t guarantee you a profit or protect you from a loss, it can help you become a more disciplined and consistent investor.

By definition, market trends come and go (although sometimes “the bear” stays longer than we’d like). By recognizing the transient nature of every bull and bear market, and by following these investment strategies, you can take advantage of the possibilities that come your way — no matter where the current trend is heading.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 7,000 locations nationwide.

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