We are now strongly into the Dr. Jekyll and Mr. Hyde markets.  One week (last week) the world is ending, and the next, specifically Monday of this week, the new GIANT bull market could be starting. 

How can the markets make these extreme swings, and what do you need to know?

Extreme Market Swings

Market sentiment is extremely volatile right now.  Why?  Because, no one, including the professionals, has any idea what the rules of the market are.  Will the government unvail a new trillion dollar bailout for the auto companies in 2 weeks?  Will it let them fail?  Will another industry be on the verge of being Death Star’d in a month?  It’s impossible to tell, as no one is confident in the value of the financial companies’ assets, as no one has any idea how many home owners can’t afford to pay their mortgages. 

On top of this, no one has any idea when they will know the answers to these questions, but they do know they won’t know it any time soon.  Thus, the massive variables will continue to play havoc with the market for some time.

What do you need to know?

There will be good buying days and bad buying days.  The problem is most people just let their 401k dump money in at specific times each month, without concern for what is going on.  This can seriously reduce your return in a market like this.  Take a look at My Open Wallet’s anger at the Monday rally, and you will see what I mean.

At times like these, it’s best to have your 401k deposited into a money market type investment and then wait for a dip to buy equities.  Market volatility is so high, that it’s almost guaranteed the market will come off it’s Monday bounce in the next 1-3 weeks, and the drop is almost guaranteed to be at least a 3-5% move. 

Of course, you are thinking to yourself, “This goes against everything I have been told.”  Of course it does, because everything you have been told is to make it as easy as possible to invest.  They aren’t concerned with returns, only with getting you into the market.  Once they get you into the market they know they will be receiving money from you every few weeks, which will increase their fees.  On top of this, if it doesn’t work, they can just point to every other financial planner and say, “See everyone is giving this advice, so I have to be right.”  This strategy reduces the risk to them, not necessarily to you.

My Strategy

I will continue to deposit my investment money into a money market/savings type account and wait for dips to buy.  It is money I would be investing anyway, so why not control when it goes in the market to improve my returns.  Will I always buy at the bottom…NO.  However, I can assure you I won’t be buying at the top.  This takes more work and adds more risk, but the risk I’m adding is negligible in a market that is already incredibly risky. 

What’s the difference if I fall from 800 feet or 900 feet?  I’m still in a world of hurt.

Of course, all that being said, there may come a point when all of my data suggests this will get worse.  At that point, I will be pulling my money out.