The Alchemist: Direction

Posted in Money Matters on May 5, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “Direction.”

The Alchemist: Direction

by Al Thomas


It is difficult to make money in a bull market, but what do
you do when you are in a bear market? In what direction should you go
not only to make money but to protect what you have from loss?

Almost immediately investors think what should I buy that
will help me reach my financial goals? This answer may not be the one
you will like. It is really not important what you buy as long as you
know the rules of the game – the stock market game.

Rule One. You must know the general trend of the market. Is
it going up or is it going down? You don’t know and worse yet you don’t
know who does. There are many who do and you can be one of them if you
wish, but you must also be willing to put aside the conventional wisdom
of Wall Street otherwise known as lies. They tell you that you cannot
time the market. You can and it is easy. I have been doing it for almost
20 years and so have many of my friends. Unfortunately, brokerage
companies do not want you to learn this simple technique to protect your
investments.

Once you know the general direction of the market you can
act accordingly. If the trend is up you should own stocks and mutual
funds. If it is down you should be out of the market in a money market
fund or in bonds.

Go on the Internet to the web site www.bigcharts.com
. Here you can type in the basic symbol for
the S&P500 Index, SP500, and then use the Interactive Section to put in
a 200-day Moving Average. If the price of the Index is below this line
you should be in a money market and, if above, you should be buying
stocks and no-load mutual funds. It is that simple.

Rule Two. Whatever you buy, and I don’t care what it is,
you must set a price below which if it drops that you will sell out.
Period. As your equity moves up so should this stop-loss price so as to
protect your profit. You don’t want to give that back when the market or
this particular equity starts down again.

The market direction changes from up to down in a rather
steady cycle of about 14 to 16 years. It has been doing this since 1800.
The year 2000 saw the top of the most recent up cycle and it is expected
to repeat with another downward direction for the next 11 years. That is
not very encouraging to people who have their retirement funds in a 401K
or IRA. During this period a money market account will outperform a
stock account.

The only alternative is a no-load bond mutual fund. This is
better than trying to buy single bonds as there is always the chance a
company will go out of business leaving you with nothing. Government
bonds are excellent and safe.

Whether or not you agree the direction of the stock market
remains down you should plan on a loss limit for the equities in your
portfolio.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.