(Today’s post features Orlando Antonini.)
I am only going to use Dow Jones as my example here.
The first thing you need to do is review the Dow Jones twelve-month average history. The past is easy – all of that historical information is available on the Internet.
But, what are the possibilities over the next twelve months? The future is very difficult to predict, and confusing.
The first thing you have to consider is this: What will the economic picture be over the next twelve months? Second, how will any one individual’s stock and/or the Dow Jones perform in the future environment?
You can use the information you find on the Internet, and do your best to analyze over a period of time and try to get a picture in your mind of what the future might hold. Or, you can turn to experienced advisors (like ourselves) who will help you draw conclusions that you are in peace and harmony with.
Why is it necessary to go through to all this effort when considering the right time to reinvest?
This will give you a better chance of forecasting where the Dow Jones may be at a future date.
The rule is, once you decide what your idea is of where the Dow Jones will bottom out, calculate 105% of that number, and that index value is your starting point.
Please Note: The following is not to be taken as what the Dow Jones may or may not be at some time; it is given only as an example to illustrate my point.
If your prediction is that the Dow Jones Index will bottom out at 9,800, this is what you would look at:
- 105% of a 9,800 index equals 10,300. Therefore, a 10,300 index is your starting point to buy/reinvest–that is 5% above bottom index.
- If the market continues to fall (Dow Jones Index), you must consider that you may have made an error in your idea of the Dow Jones Index bottom being 9,800. So, 95% of a 9,800 index (or a 5% difference) equals 9,300.
- At 9,300, you need to re-exam whether you should leave the Dow Jones or stay with your analytical conclusion.
The most crucial thing to remember is that you have to continually analyze your assumption against new information about changes in the market as it comes in.
This is an example that can help you say when to do something and when not to do it, and have a base line of facts or assumptions that you can analyze with. Or, use professionals (like us) to help you do the analytical work.