The Ten-Percent Solution

The stock market is at a supposedly at an all-time high, and you feel burned because you had sold out during the market downturn in 2008-2009 and moved over to the sidelines. You remember watching the DOW plummet from over 14,200 down by half to fewer than 6,800 points and, because of emotions, you panicked! You pulled all of your money out thinking that the market was certainly going down to zero, and it was best to save something, as opposed to having nothing left at all.

At the time, you thought that it was a great move, and you watched the DOW bounce back up to 7,500 then 9,600 then 10,400, then 11,200 and then 12,800 – due to the media buzz about Spain, Italy and most of Europe supposedly on the verge of going broke, then that noised got drowned out by to the US 2012 elections and all the hype about a “fiscal cliff.” You thought you would wait until it went down again, but it stayed there for quite a few months. You moved on to other worries and forgot about the market, only now it is all over the news & Internet that the market is back up to over 14,400—A Record All Time High! And each day you see and hear in the news media that US Stock markets have doubled! The DOW is at record high! Another day another rally on Wall Street!

Now, you are kicking yourself that you had made a huge mistake by pulling everything out – you mistimed the market yet again. Nobody wants to hear “I told you so,” but you do not make money by selling lower than you bought at, and no matter how bad the market got, you should have never pulled out the money you need for a long-term: that is money that you will not need for the next five (5) years or longer. Money that is needed for five years or less should never be in the stock or bond market.

NOTE: Since the Dow Jones Industrial Average was founded by Charles Dow on May 26, 1896 (almost 117 years now as of today 03-12-2013), no matter how bad things get, it always bounces back to a higher level.

Now, based on emotion, you want to go back in at the top of the market thinking that since you were wrong and about selling off at the bottom, that maybe you should go back in so you do not miss out, because if it keeps going at this pace, in another five years it will double again to 28,000!

Emotions mixed with the stock market, in my experience, will always make you zig when you should have zagged and vice-versa.

I said this was a very real possibility after all it went from a low of 6,667 in 2009 to now 14,400 in 2013. In addition, there is so much money on the sidelines in cash that is paying almost zero returns, not to mention the hundreds of billions of dollars that that is the bond markets, which is clearly in a bubble!

It would not be wise to do what all the uninformed investors are doing: that is to jump all in at the (current) top of the market.  But, I have some good news for you (more on this later).

The 10% Incremental Solution to get back a Maximum of 70% in the Market

If you did, in fact, pull all of your money out of the market OR this is your first time venturing in the stock markets, here is the best way to play this market safely. Try the 10% Solution:

Take 70% of your total investment portfolio (only money that you do not need in the next five years). Start by putting back or investing 10% in the market now; invest in/buy good mega quarterly-paying dividends stocks such as  AT&T (T),Wal-Mart (WMT), BP plc (BP), General Electric(GE) Pfizer(PFE), and Procter and Gamble (PG) and most important, the utility companies that supply you each day with Gas and Electricity

No option to individual stock?

If all your money is in your work-related employer sponsored plans such as a 401(k), 403(b) and RRSP plans etc., and you do not have any access to individual stock, then go into a Index Quarterly dividend paying Mutual Fund that invest in the S&P 500, stock that is the largest US 500 companies.

After you get the first 10% in, wait for three months and put another 10% in, and then wait for yet another three months in 10%. Now that you have 30% in STOP and wait for a significant sell off (this may take years, but it will come) and feed in another 10% increment as it keeps dropping until you have in a maximum of 70%.

Summary of this safer investment strategy:

1) Only money that you do not need in the next five-plus years will be in the market.

2) If the market keeps going up, you do have at least 30% of your money in the market that is earning more money for you.

3) If the market goes go down, then you are still earning money by having your quarterly dividends buying addition shares at a much lower price. Also, you can keep investing 10% until you have your maximum of 70%.

4) When the market does crash again (and I guaranteed that it will) you still have 30% that are safely out of the market and, if you are smart, you will take part of this 30% and pick up a few really good bargains, but only do this to the extent that you still have 30% out of the market (that is rebalancing, please see my book for more detail on this ).

5) You will no longer make the mistake of selling off everything again and miss out on the bounces that have ALWAYS happened for over 116 years now.

6) If the market does stay down for awhile and you collect a lot more shares via your dividend reinvestment plans (aka DRIP), you will learn to love a down market when the market rebounds again, and you see how fast and quick you have earned some very good money.

7) Most importantly: You turned off the day-to-day noise of the media on the markets, and you will have learned that it is not possible to time the top or the bottom of the market.

Question: Why does the stock market sometimes climb higher past the point when it should have corrected?

Answer: The herd mentality!

You see; most investors will always rush back in at the top and as the first round of them come back in it pushes the markets higher yet.

Not wanting to miss the boat, more come in and push the market even higher and this keeps going until even the first group who first came back in now start to think they should put even more in because the money that they had put in have gained so much in such a short time. They think that they must put more in, and this keeps driving the market higher.

In addition, we have a new group of buy-on-the-dip investors, so these new investors keep propping it up and counter any corrective pressure on the stock market.

And before you know it, the market has doubled and then tripled, and even the big guns do not want to miss out, so they pour back in because they do not want to have a bad report card at the end of the year. And this is a recipe for a “Bust.”

Again the solution is to always keep 30% out so no matter how bad it gets; you will not have to panic and sell off because you have 30% that you can use/live on until it rebounds again to a new high.

Sherwin Brown

About Sherwin Brown

Sherwin has been an entrepreneur since he was twelve years old. He currently teaches, writes, and speaks to people about how to improve and safeguard all aspects of their financial portfolios.