This market might be the ultimate buy-low bonanza… for long-term investors.

Underneath all that churning and spinning, prices on sturdy blue chips are deep bargains and dividend yields are high. Put a few in a 20-year plan and you should do extremely well. 

Mike thinks so, too. "But some of us aren’t 20 years away from retirement and our children are already in middle school. Then what?" What’s in this market for people with shorter timelines?

Thanks a bunch, Mike, This gives me a natural entrée to repeat something I like to say often—in bold: if you have money that you expect to start using in five years, it does not belong in stocks.

I know, I know. It’s a very unpopular message. But the stock market does not behave predictably enough to count on getting the right price with such precision. Not even if you choose great companies.

Still, the bargains out there are phenomenal today. It hardly seems right that anyone with a shorter horizon should walk away.  And the risk is lower at low prices than it is at high prices…

If you have a shorter time span, you can still invest. But know what you’re risking. Even a 10-year horizon is too short if you plan to take all your money out of your account in Year 10, rather than just small withdrawals that year and more later.

Think of the people who bought 3M, a highly respected stock in 2000. As of today, 3M stock has gone from around $48 in November 1999 to $60 now.  A 25% gain in 10 years is not much reward for the risk. What’s more, 3M is falling again. And it was worth $85 just last December. It will probably be priced there again in the next year—but if you have to take the money out now, you won’t get it.

On the other hand, if you only need to cash out 5% of your holdings now, you should have the time to get better prices on some of your sales.

So, yes, go ahead and get into the market if you have a shorter time span, but do realize the danger.

And control it. There are two ways—by being a trader and with stop losses (which is also a trading technique).

As a trader, invest but keep an eye on trends and momentum. Learn to use important technical signals because often the stock breaks down before any press release comes out to explain why. You don’t need to be a day trader with a thousand obtuse gizmos. But at least get comfortable with using trend lines.

As for the stop loss, that will automate the decision of when to get out for you. Do be aware that you might not like the results, though. In fact, in a market like this you probably will hate what happens.

Let’s say your 3M peaked in December. When it fell 25% from its high, to $63.75, you sold. You took that $63.75 and put it in another good blue chip. You put it in GE, and in June, it had fallen 25%, too. MasterCard was hot, still trending up strongly, so you went there… and on Aug.1, it had lost 25%. You have now hit three stops in a row on blue-chip stocks.

But by golly, those stop losses will keep you safe so you persevere. Consumer staples are the place to be… you finally got it right when you put your money in Coke. This one goes up 4% for you. Then it falls, too. When it’s down 25% from its high, you only have a 22% loss this time.

Now you’re up to Oct. 10. Care to see how that worked out?

Not well. For every dollar you started with, you took three 25% losses and one 22% loss. You have now lost 66% of your money. That’s slightly worse than you would have done sitting still with your first purchase. And if you’d banked dividends, your loss would be noticeably smaller.

So please don’t kid yourself that stop losses keep you safe. In a bull market, they do help because they don’t get hit left and right. But in a bear market like this that brings all stocks down, you are likely to hop from one sinking ship to the next.

If you do want to invest for the short term and use stop losses, I suggest you tailor them to the stock. Place your stop loss where the stock signals it’s turning around—for instance just below a bull support trend line.

And good luck.

P.S.  To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: This well never run dry... 44% on Canada I shares, 34% on AXA puts, 25% on Align Technologies puts, 367% on Convergys puts and an up and down special - 90% on Suncor calls and 25% on the puts... all in the last month. The market always has profits for you with The Optionist]

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