All Ready for a Raging Bull

Why I'm betting on a mechanical strategy.

By + More

Here's diving into a down market. Just in time for my 30th birthday a few months back, I finally got my finances in order enough to open my first brokerage account. I should mention that I'm a faithful 401(k) contributor, but I don't count on seeing that dough for another 35 years or so.

Money I won't see until my late 60s doesn't really seem like money. And I have to admit, charting my course with a supermarket-worthy selection of stocks, funds, and exchange-traded funds just felt more Working Girl (or, better yet, The Secret of My Success).

As it turns out, I jumped into the stock market's version of a demolition derby. Immediately after my hard-earned money entered the stock market, a heap of it disappeared. Today, the value of my fledgling portfolio is worth roughly one fifth less than what I started with. So be it.

Bear markets are actually great times to invest. When stocks recover, the ETFs I bought on the cheap are in for a stratospheric ascent. Still, I'm settling into the idea that recovery may not arrive for a while: Since 1928, the average bear market has lasted 1.3 years, according to Jim Stack, president of InvesTech Research. Only two of the past 15 bear markets have ended in less than six months (although since 1940, more than half of the bear markets have ended in under a year).

Game plan. I decided that before I marched any more money into this hostile market, I needed a few ground rules. First, because I have no problem watching my portfolio bounce around like a pinball, I chose an aggressive strategy: 100 percent stocks. When I reach a balance I'm genuinely afraid of losing, I'll add some bonds.

Second, I will invest as cheaply as possible. I started down that road by using a bare-bones discount brokerage that doesn't charge commissions as long as I maintain a minimum balance. I also outfitted my portfolio with a handful of ETFs, which are even thriftier than index funds. The backbone of my portfolio is Vanguard Total Stock Market ETF, which holds a quarter of my money. That fund focuses on industry leaders, so I chose another devoted to small and midsize companies. And because I believe some of the best growth opportunities lie outside the United States, I added three overseas-focused funds.

Finally, I couldn't resist stashing some mad money in a solid company with a staggeringly cheap stock: Dell.

Why am I betting on a mechanical strategy rather than some brilliant stockpicker? So far this year, actively managed funds have had their hats handed to them. Bill Miller, one of the most respected names in the business, is on a horrific losing streak. His Legg Mason Value Trust fund has lost nearly half its value so far this year, and his three- and five-year numbers don't look good.

My argument isn't a new one: If the fund industry's biggest brains can't get it right, why pay their hefty fees? I admittedly own actively managed funds within my 401(k), but there, I get the added bonus of tax-free growth.

Finally, my ace in the hole: dollar-cost averaging. By channeling money into my portfolio at a set time each month, I eliminate the possibility that it'll all go in when the market's up. This way, I don't have to worry about it. I just keep putting money in—and looking forward to the next bull market.