Dear Fellow Investor

I have been thinking for some time now about what point to get into the market again after a severe drop.

After the 2008 / 2009 market decline I was 82% in cash and up 0.5% for the year. I was very comfortable with my cash position and felt reluctant to invest again.

This is exactly the situation Jeremy Grantham described in his excellent article titled “Reinvesting when terrified” (free registration required). I have realised the described paralysis setting in with me too.

A further factor that made me hesitate to slowly invest again was the rally which I did not think would hold as the underlying economic numbers were still deteriorating.

I used the rally to exit a few lower quality companies in my portfolio and to replace them with high quality companies that are truly trading for attractive half century (a guess) historical valuations.

The more the market declined the lower was the probability of future substantial declines. This excludes the situation where the world economy falls apart completely. But then I guess holding cash is also a problem.

Accomplished fund manager Bruce Berkowitz in his article “If Not Now, When?” also made the argument for selectively buying even though he is known for “premature accumulation”.

March turning out to be another rotten Month for the markets but having taken the decision to get in again slowly I became excited.

That has however been a recurring theme with me at that time.

What this means for you:

• As markets are still declining, write out a strategy that would make you comfortable to slowly start investing again. An example would be to invest 30% at an index value of X and 50% at X -20% and 100% at X -30%. This will stop you freezing up with all the negative news and enable you to think past the current turmoil

• Write out a list of possible buy candidates and a strategy to ease into the desired position slowly

• Consider selling existing negative positions to realise the loss for tax purposes before buying more. Be clear on any tax legislation before implementing

• See if you can negotiate lower commissions at your brokerage company as you may be executing more trades with smaller amounts than usual to slowly move into positions

• Remember it is always easier to buy on the way down as there are a lot more sellers that at the actual bottom. Buying on the way down, if the company is already undervalued is thus the way to go.

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