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Personally, when the market feels a bit frothy to me, I like the idea of having some money in counter-market things that could be easily liquidated if/when a correction actually happens. But since I've been expecting that correction for about the last 20% gain of the S&P, I've not only missed out on a lot of upside, but I've had some of those contrarian investments go real sour as well. It's been a nice (albeit somewhat painful) lesson about calculated risks with well-defined downside (which unfortunately I didn't adequately employ).

Same here! And fortuitously I'm getting "The Making of a Market Guru", the anthology of Ken Fisher's Forbes columns, in audiobook form during my commute these days -- and while I'm far from agreeing with everything he says, he does make a lot of great points over the decades (and the evolution of his thinking and investing over the same decades makes for a fascinating read -- but, I'm digressing, as usual).

One far-from-new idea that he's helping me focus on again is, basically, to focus on the big movements, decreasing the amount of attention that it's so sadly easy to focus on corrections and fluctuation.

And to reinforce that, Mark Hulbert (of "Hulbert Financial Digest" fame) in the May 2011 copy of AAII Journal (well worth the cheap AAII membership IMHO) has a short fascinating article on how the many advice newsletter he follows would perform much better if they basically didn't trade -- he compares the performance of the model portfolios he's been constructing for years to track newsletter recs' performances, with otherwise-equivalent model portfolios where positions change only once a year, based on the then-current recommendations as of January 1st.

The "no trade during the year" (AKA "readjust only on Jan 1") model portfolios beat the normal "trade as per recs throughout the year" ones every single year -- including years with huge major trend changes like 2009.

Amazingly, in particular...: the best performing newsletter, per Hulbert, in the "mutual funds advisory services" category over the last 10 years, actually hasn't published an issue since 2004 (though it's theoretically still in operation so Hulbert keeps tracking it) -- seven years without a single change in its model portfolio helped its performance enormously [it's also the third-best performing overall out of all the hundreds of newsletters Hulbert tracks w/model portfolios].

In particular, focusing on all cases where a new stock was bought within 30 days of selling a previous one -- the new stock (on average) underperformed the old one by over 3% over the following 12 months.

"Don't just do something: sit there!" remains as great a piece of advice today, as it was when, over 100 years ago, legendary speculator Jesse Livermore penned his famous quote -- "Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting"...

So, I'm back to the idea of keeping no more than about 5-10% of my immediately investable funds in "dry powder" cash (just because awesome opportunities can pop up at any time) -- until and unless a real bull market top can be confidently called, which is going to be at least a couple months after it peaks (an idea Fisher quotes from another long-tenured Forbes columnist).

As long as there's lots of worry and negative news widely spread around... the top's not there yet: real, big bull market tops comes when everybody's getting irrationally optimistic, worry dissipates, and "this time it's different". We're not there yet, by a long shot: "the bull market climbs a wall of worry", and at this time, there's plenty of worry to go around, so it's far too early to sensibly call a bull market top. Sure, I'll miss the 10%-or-so corrections, and similarly give up the first 10%-or-so when the real bear market starts because of the couple months delay in recognizing it: that's OK, this approach still way outperforms the running-scared one of pulling substantially out at each "impeding correction" (most of which won't actually happen or not be as substantial as 10%). "Being right far too early" (which describes the way I've often felt) is a nicely diplomatic way of spelling "being wrong"...;-)
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