- 1). Define your objectives for stock marketing investing. If your goals include the maintenance of money's purchasing power, the stock market provides a historical advantage. According to the DollarTimes.com, $1.00 in 1929 compares to $12.63 of purchasing power in 2010. (The site states an annual inflation rate of 3.18 percent occurred throughout this period.) The value of the Dow Jones Industrial Average at less than 100 during the early 1930s--compared to more than 10,000 in 2010--shows the capital appreciation power of the equity markets. The stock market average has more than kept pace with inflation.
- 2). Acquire companies with undervalued assets during a comparatively low stock market. Professional investors, such as private equity firms, have raised money to invest in asset-rich companies. Manufacturing, airlines, mining and fabrication have assets on their books at higher costs than the current market values. Discerning investors may look for "hard assets" instead of standard equity valuation characteristics in such stock market conditions. Professional investors identify these opportunities with the goal of selling undervalued assets or reorganizing the company in some way to maximize shareholder value. Shareholders may profit from these decisions.
- 3). Purchase undervalued mutual funds in a decelerating stock market. Research the mutual fund's portfolio of investments and calculate the net asset value (NAV) of the fund's shares. In comparatively lower stock market conditions, some mutual funds that trade on the stock exchange may trade at prices below their actual net asset value. This strategy, based on the idea of acquiring assets for less than their current value, requires patience and the ability to hold funds until the market properly values them.
- 4). Determine your portfolio's total income and dividend yield. Many conservative investors realize that dividends cushion equity value to a degree. With low comparative rates in the bond market, high-quality dividend-bearing securities (subordinate to debt instruments in the event of a corporate bankruptcy) should be compared relative to your investment and risk objectives.
- 5). Investigate the use of an options writing program to hedge a stock portfolio during a low or declining stock market. Options have conservative uses, in addition to speculative ones. Professional investors seeking to make their portfolios "market neutral" use options to protect the stocks they manage from further market value declines. Using options, rather than outright sale of stocks, protects the portfolio's value. Using options may also benefit investors in other ways.
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