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3 things smart investors do in a falling market

Today, as the S&P/ASX All Ordinaries Index (Index: ^AXAO) (ASX: XAO) approached official correction territory, I bought some shares for my SMSF.

More on that a little further on, but first, the news…

— The Aussie dollar has sunk to a 20-month low. If you thought that was low, remember it was only a few days ago that Professor Ross Garnaut said he won’t be surprised if the dollar drops to 70 or even 60 US cents.

— Nearly 100 different companies have downgraded earnings — and counting.

— Some small miners have just a month or two worth of cash left before they’ll flame out. Or be bought out… no doubt at prices that reflect their desperation.

— GDP is coming in below trend, and the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) is down some 7% in the last 30 days… falling again today, back below 4,800.

— The bank sector is faring even worse… with Westpac (ASX: WBC) alone down some 15% and National Australia Bank (ASX: NAB) a close second, sinking nearly 14%.

“So has the music stopped for the banks or is this just a buying opportunity? If the answer is the former, where does the money go?”

This pressing question was asked by a writer in The Australian Financial Review. He cited the U.S. Federal Reserve’s possible winding down of QE… and how big Australian banks have recently been pegged as the world’s most expensive.

I’ll take on that question — and the much more important question: Where will your money go? — in just a moment.

But first, let’s look at one truly scary economic indicator.

A REAL emergency!

“News that the economy is running at 2.5 per cent, way below trend of around 3 per cent to 3.5 per cent, is also a worry, as is the fact that, in real terms, Australians are spending less on beer, wine and spirits when compared to a year ago.”

Don’t you love how 0.5% to 1% is “way below trend”?

Other than the drop in spending on beer and wine… There’s simply no cause to call use words like “emergency” or “tragedy.” (Simply read on to find out the sad reality I would be so bold as to deem a tragedy!)

Even “way below trend” strikes me as a wee bit alarmist.

As a Motley Fool Take Stock reader, you know I’ve been saying that a falling market, and even a short-term slowdown in the economy, should be no cause for panic.

In fact, such conditions can create fantastic buying opportunities for patient, business-focused investors. Who doesn’t love a sale?

Unfortunately for some, and fortunately for Foolish investors — not everyone does.

Which brings us to that crucial question…

Where will the money go?

The answer is unfortunate. The hot money in the market will continue chasing the latest “safe” asset class… Doing whatever the rest of the crowd is doing.

Do you remember when gold was hot? And supposedly “safe”?

Gold last 6 months

Source: Kitco.com

Is it a tragedy? At the very least, chasing anything hot, be it gold, bank stocks or even Woolworths (ASX: WOW) is hardly a recipe for market-beating returns.

Yet the question for investors like you and me is utterly different!

It’s just this: How will we take advantage of the falling market? Where will your money go?

3 things smart investors do in a falling market

Here are three simple things we’re all right to be doing now, as Foolish investors. It’s a simple investing philosophy that can lead you to market-beating returns over time, helping you to build your wealth and avoid the errors of the crowd.

1. Don’t panic. You’re investing for the long term, not for next week or next month.

2. Don’t change your outlook just because the market has declined. The world will not end, and you’ll get better deals as the market declines…

3. When valuations are attractive, buy more shares.

I want to let you into a little secret…

Today, I bought some shares for my SMSF…

I can’t reveal the name of the stock due to our strict trading rules.

But I  can tell you this… the stock is just plain cheap — it trades on P/E of 11, and a fully franked dividend yield of 4.7%.

Here’s the real kicker…

In April, this company upgraded its profit guidance, which naturally sent the shares flying higher.

But today, courtesy of some general stock market turbulence, the company is trading at the same price it was before the profit upgrade.

Thank you, Mr Market.

I’m not done buying, either, with at least three more companies on my radar, all looking particularly attractive after this recent sell-off.

Sure, my SMSF is feeling a bit of pain right now.

But on the bright side, it’s a great time to be buying stocks. I’m not about to look a gift horse in the mouth.

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Of the companies mentioned above, Bruce Jackson has an interest in Westpac, NAB and Woolworths.

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