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This Key Rule Will Help Keep Your Investing Simple

by WOOWinvest
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This Key Rule Will Help Keep Your Investing Simple



Between price targets, charts, portfolio balancing, reversion to the mean, and many other terms and concepts, investing can quickly become quite confusing.

Real money columnist Paul Price says there are ways to make everything clear, starting with a simple rule.

“As of Monday, the S&P 500 is down 12.20% in the first 50 trading days of the year,” Price wrote recently on Real Money. “Certainly, it’s up slightly this week, but if you’re already long stocks.”

However, Price added, “If you have money to put into work, that’s a great opportunity.”

This is Warren Buffett’s investing rule: sell when everyone buys; buy when everyone wants to sell.

When the market is down, it’s a good time to start snapping up cheap assets.

Equally important, Price stressed, the sharp drop was not just temporary. That is, their lifespan is usually short.

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“Only two of the 10 worst starts for the stock market fell further by Dec. 31 of the same year. In one of those two years, 2001 was a mere 0.26% increase.”

Additionally, “the only example of a sustained big loss was 2008. The shockingly bad sell-off that year continued until March 9, 2009, before a U-turn that resulted in a 43% gain for the rest of the year.”

In fact, “the average of all 10 bad starts turned into a 29.10% average gain through the end of the year, including two down years (2001 and 2008).”

takeout? In a way, this is a lesson about investing. Buy when the price is low.

However, from a more professional perspective, the value of your holdings changes as the market goes counter-cyclically. When the market is going up, it’s a great time to own a lot of stocks. These assets will appreciate in value as prices rise (until you sell them, preferably at this high). When the market is low, it’s a good time to hold a lot of cash. You have money on hand to invest.

The other side’s stance can be a little paralyzing for investors. If you’re flush with cash during a rising market, it can be hard to find an investment that justifies the expense. Your gains may be negligible. If you hold a lot of stocks during a market downturn, you generally want to hold those assets until they regain their value.

Therefore, it is wise for investors to prepare themselves for action. Don’t necessarily try to time the market, but keep an eye on your liquidity. You don’t want to miss out on the opportunities that a down market can create.

PLEASE NOTE: It is important to remember that you should not buy or sell stocks based on reading an article. Investors should do their homework. For more research and information, consider using TheStreet Quant Ratings’ quantitative approach to stock picking. Or, get TheStreet’s smartest insights from the smartest analysts, delivered to your inbox daily with TheStreet Smarts.

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