What to do during an "adjustment" of the market

"I know that Americans are concerned about the changes that are occurring in our financial markets." - President Bush

Adjustment!?!

What on earth is a financial "adjustment?" Market

Although sugar-coating, President Bush got one thing right, Americans are concerned. More like fear. Fear took over the markets. And I must tell you, I love every second of it ... and you should be too.

The U.S. economy plunged into recession. Unemployment has risen more than 50% over the past two years. Investment banks, multi-billion dollars, as Bear Stearns, Lehman Brothers and Merrill Lynch raised against the housing market have disappeared (Goldman Sachs and Morgan Stanley could be followed shortly). Government-sponsored enterprises Fannie Mae, Freddie Mac and Indy Mac were completely swept away.

All the bad news has sent the major indexes falling into bear market territory. Inexperienced investors are starting to feel helpless. And they're starting to act.

In July, investors pulled $ 23 billion of common stock funds. In August, continued off the sale of mutual funds as investors pulled out an additional $ 6.5 billion. Purchases of mutual funds surely only worsen the decline in the market.

When investors want their money back, mutual funds must pay. They usually have plenty of cash on hand. But when a lot of investors want their money back, as we have seen over the past two months, were able to sell shares to raise money to repay investors.

This is good news.

Overall, investors in mutual funds put money and pull it back out to the worst possible moment. The tech bubble is the perfect example. In 1999 and 2000, money flowed into mutual funds technology-focused. At the height of the tech bubble in March 2000, approximately 80% of all money market funds was in the technology funds. All this new money pushed the NASDAQ to a peak of over 5,000.

When the crisis came, not always, mutual funds leading technology lost 60% to 80% of their value as the NASDAQ plummeted back to 1,000. And the majority of investors in mutual funds not sold along the way.

Mutual fund investors waited and waited for a rebound to come. In typical fashion, most were not willing to give up hope and take a loss at first. However, after the NASDAQ slid lower and lower every day for the next two years, have begun to sell.

As usual, they were selling at the worst possible time. In 2002 and 2003, when the major market indexes were hit bottom, the mutual fund outflows were at their peak.

It is only proof of the pack is almost always wrong. Buy at the top and bottom sell. That's why I believe that the recent increase in redemptions of mutual funds a good thing.

In the short term, only adds to selling pressure in stocks. In the long term, it means there is a light at the end of the tunnel.

Although I expect more bad news from the financial sector, it is hard to imagine getting much worse. After all, when every forecaster is predicting "another shoe to drop," it is likely that the markets are prepared for this.

So, I do not think the end of the sell-off is over by any means, but I do not think we're headed for financial apocalypse. Over the next 12 months we are going to get a lot of bad news towards the end, we will start getting a bit 'of good economic news. There will be violent market swings along the way, but they will come to order. They always ... at the end.

In cases like this, when all the experts calls for a crash, try to take a step back and look at history. If one considers a bear market the Dow fell by 15% or more, there have been 25 bear markets over the past 110 years. Most of them have a duration between 12 and 24 months. The mean decline is between 20% and 40%.

If you consider this bear market began last October when the Dow hit 14,000 last we're probably looking at between one and 13 months, and possibly another 10% or so to hit rock bottom.

The best thing to do now is learn to love bear markets. It 's the only time in almost all the shares offered for sale. And this is the best time to buy.

Of course, I do not recommend going "all in" today. Trying to time a fund can be disastrous. But right now, is more necessary than ever to have a plan.

I saved up enough money to buy consistently every month for the next 24 months. A plan of 24 months should be exactly what you need to make it through this bear market.

After all, at this time there is a lot of money sitting on the bench. While investors have been saving mutual funds as quickly as possible, an additional $ 44 billion has flowed into money market funds with their brokers. In August, a total of $ 3.5 trillion is sitting in money market funds.

The herd is moved to the safety of money markets in a big way. Once the markets start to show some signs of life, a large part of those money market funds back in action. It always does.

During the "market adjustment" when it seems that buying stocks is the worst thing to do, is likely to be the best thing to do. Prosperity in the expedition, until we have a solid plan (and stick to it), you can learn to love even bear markets .......