When do you get back in after getting out?
This is the most important question to answer today – after we just experienced the fastest bear market in our investing lifetimes.
We read everything we could on the topic… In particular, we focused on what the most successful traders and investors did with their money over the past 100 years.
After a lot of reading and research, we came up with a simple two-part system. I’ll share it with you today… including what it means for the markets right now.
Long story short, we realized that getting back in had two components:
- A mathematical one, and
- An emotional one.
We learned a lot about what the best investors have done throughout history. And we wanted to devise incredibly “dumb” rules for getting back into an investment – rules so simple that it would be obvious if one of us was trying to break them.
It’s easy to get passionate about your ideas… And most of the time, it’s not a bad thing. But sometimes, the markets go against us. So when do we get out? And then, when do we allow ourselves to get back in?
We already had our “sell” rules in place for the first question. We were already using trailing stops to limit our downside risk – even back in 1996.
But we had to set “buy” guidelines to prevent us from emotionally jumping back into what ultimately might be a bad idea. So we settled on two foolproof rules back then:
- If the stock or investment hits a new high, then you are allowed to get back in. (That doesn’t mean you have to get back in – a new high might be too expensive for your taste.)
- If No. 1 doesn’t look like it’s going to happen, then you need a “cooling-off period” before you are allowed to buy again.
The first rule takes care of the math. The second rule takes care of the emotions…
For the first one, the principle is straightforward. A new high means that the investment has unequivocally erased its loss. And therefore, whatever caused that loss is likely behind us. That keeps it simple and sensible.
For the second one, think about it like buying a gun. There’s often a three-day “cooling-off period” involved. This way, a person can’t just get emotional, buy a gun, and immediately take the law into his own hands. The waiting period gives him time to come to his senses. It’s probably not scientific – it’s just a measure in place to control emotions.
We set our cooling-off period before buying back in at six months. So if a beaten-down investment doesn’t hit a new high to erase the past, you then have to wait past the cooling-off period. There’s no real science to it – it’s just to keep you from making a bad decision based on emotion.
So what does this all mean right now?
Well, COVID-19 came out of nowhere and clobbered the stock market. Nobody saw it coming. And stocks fell into an official bear market faster than we have ever experienced in our investing lifetimes.
I recommended my readers follow their trailing stops. But today, based on our 1996 rules, it’s time to get back in…
You see, the Nasdaq recently blew past 10,000 for the first time in history – an all-time high. This new high is incredibly important…
Remember what I said earlier? “A new high means that the investment has unequivocally erased its loss. And therefore, whatever caused that loss is likely behind us.”
This is where we are, right now.
To me, this means that the market has moved beyond COVID-19. It means that the Melt Up can pick up where it left off. And it means that stocks can soar far higher than anyone can imagine.
Don’t get me wrong. I don’t mean that COVID-19 is behind us. I don’t mean that we can’t have a second wave or that there won’t be more struggles ahead. What I mean is that the stock market has already assessed these factors, and it’s not worried.
We’ve seen new highs in the Nasdaq. So according to our two simple rules, it’s safe to get back in. And I recommend you do just that.
Good investing,
Steve
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Source: Daily Wealth