Subprime Correction Is Over, Really

It took a week after my pronouncement that the subprime induced stock market correction is over. Now it’s really over. The major indexes for both the U.S. and the international market, the Dow, S&P 500, MSCI EAFE, all went over their previous highs.

I’d like to enter these notes for myself as lessons learned from this episode of the stock market correction.

1. Stocks are stocks. During the correction, different classes of stocks — large cap, small cap, value, growth, REITs, international, emerging markets — all went down. Some went down more than others, but they all sank, because they are all stocks. Diversification within stocks didn’t help much, at least in the short term. The only thing that held the floor was bonds. If the purpose of asset allocation is to reduce short-term volatility, first look at the stocks/bonds ratio.

2. The bottom is unpredictable. Who knew Aug. 16 was the bottom? I sure didn’t. Had I known I would’ve bought a lot more.

3. Don’t place the limit order too tight. If you decide to buy, just do it. Don’t place the limit order too tight. I had a limit order going for the Vanguard FTSE All World ex-US ETF (VEU) at $50. The intra-day low for VEU on Aug. 16 was $50.40. My order wasn’t executed. I foolishly hoped that it would go under $50. It never did. Today VEU closed at $61.41, more than 20% higher. I did pick up some iShares Russell 2000 Value ETF (IWN) at $72.50 on Aug. 15, and some Vanguard REIT ETF (VNQ) in July. But I only have a 10% gain on each so far.

What lessons did you learn?

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