February 17, 2011

What to Buy in a Pullback

The stock market has been on an absolute tear recently. The Dow’s 2,500 point gain in the last five months has caused market sentiment to jump, resulting in impressive flows to equity mutual funds. Earnings news has been resolutely positive, and investors seem to be intent on reallocating assets from fixed income to stocks.

In other words, it’s time to start planning for a potential market pullback.

I believe that a selloff will be more of a buying opportunity than an excuse to sell. The reasoning lies in the market fundamentals. Over the long run, stocks will track the direction of earnings, which have been very impressive. And what separates investing winners from losers is the ability to create a market view and maintain it, even when those around you throw in the towel due to greater than expected volatility.

In other words, diversified investors will be the ones most likely to come out of any market pullback intact.

I will highlight a few investments I’ll be monitoring in the event of a drop in stock prices in my next blog post. Remember, planning is a key element to success in the markets, and building a game plan is a big part of that equation.

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