1. Begin Humbly: We never know how far these drawdowns will go or how long they will last. Is this a shallow 20% pullback? A 30% crash? Worse? (We don’t know). 2020’s 34% crash barely lasted a month, the 2008-09 GFC ran for 18 months, and 1966-1982 bear market was 16 years long.
Begin your plan by acknowledging you are venturing into the unknown. Never bet the farm or assume so much risk that an entire portfolio can be destroyed if the underlying premise turns out to be wrong (aka “early”).
2. Seek Asymmetry: Look for opportunities that have much greater upside than potential downside. Traders never know which of their positions will work out or not in advance. There is value in creating a potential for net gains, even if you only bat .300.
3. Automate: The best-intentioned bottom buyers often fail to execute trades (despite their own desires) out of fear and emotion. Remove your limbic system from the process by deciding upon a series of entries, and then automating them.
4. Buy Over Time: Rather than guessing a specific “ideal” entry date mid-sell off, consider spreading out your purchases across months. Pick six dates over the next year with chunks of your discretionary trading capital. This guarantees you will be both early and late – but it also creates a high probability your average purchase price will be considerably lower than where the market is six months into the recovery.
5. Buy Across Prices Levels: Another approach to avoid guessing the bottom is to make multiple purchases at different price levels: Example: Set GTC limit purchase orders to buy a broad index down 19%, 26%, 33%, 42%, even 53%. (I like to avoid round numbers). If only half of your orders get executed it means markets avoided matching some of the worst downturns of the past 20 years – but you were still a buyer at advantageous prices.
6. Favorite Stocks: As much as I like broad indices, some folks have their favorite companies. Consider the ones that may have run away from you last cycle that you would like to own long term. Whether its Nvidia or Apple or whatever your personal fave, follow the same strategy of making multiple purchases across different price levels.Link here.
