These are shocking times for many people as they witness firsthand the erosion of the equity and value of their homes and begin to feel the financial pain and uncertainty this has brought into their lives. Yesterday the markets dropped more in a single day than they have in any day since 9/11. Pundits will be out in force today telling you things will come back. They always have and this time will be no different, or will it? I'm not convinced it will, at least not very quickly. So if you want to survive and prosper in the next few years, I've got 3 keys that you simply can't afford to ignore.
The cause of this crisis is clearly uncontrolled greed. It's not the bank's fault of the government's. We have nobody to blame but ourselves for wanting more than we could afford. The market simply filled the biggest need that we had and created lending programs that allowed us to access sources of capital that allowed us to raise our lifestyle without inflicting much immediate financial pain.
The economy was awash in lots of easy and cheap money that we used to drive up the cost of everything from homes and condos, to cars, boats, clothes, and food. Now the easy money is gone. The shell game the banks and lenders were playing has been exposed in a very public way. As a society, we broke the #1 rule of personal finance "live within your means" and now we're all going to have to pay a heavy price to bring things back into their proper perspective.
The irony in all this is that at the time we're all feeling the most pain, there are some of the greatest opportunities that will be leveraged by a small group of wise investors to create amazing wealth. Will you be one of them? Not if you're sitting on the sidelines.
When times are tough the typical thing most investors do is run for cover. They move to cash or money market funds, they stop opening their brokerage statements thinking it will make the losses they would see easier to take. Doing nothing in times like these will assure that you get the worst of what the market has to dish out. Now is the time for action, not paralysis
Here's 3 essentiall keys to help you weather this storm and come out on top when this crisis ends.
1. Always plan for the unexpected. In just the past 4 months we've had a the worst single month in the markets since the great depression, and the worst one day drop since 9/11. More bad news will inevitably come out and further dampen and already dismal investor sentiment which in turn will lead to more selling and more lost money for most investors. It's not too late to put up the safety net if you haven't already. If you used stop loss orders on your holdings, congratulations the money you saved will give you a solid leg up when the market turns again.
I tell people who take my courses that if they ever have a catastrophic loss after they finish my class - Shame on them! That's right. If you make a rule to never lose more than 10% on any single investment and use the tools at your brokerage firm to help you stick to that rule no matter what the market does, you'll be able to eliminate completely the catastrophic losses from your future. Imagine what an extra 2-3% overall would add to your retirement account if you didn't have that one massive loss each year. Compound that savings over your lifetime of investing and we're talking some serious money.
So key number one is to cut the bleeding. Put up the safety net and stop losing money when the markets tank.
2. Learn to trade options and ETF's. If you've been told options are risky and that you have no business trading them, you need to take a second look. I personally don't know how any investor could have survived the carnage in the markets in 2008 without using some simple option strategies. The fact is that a well diversified portfolio won't help you weather this storm. That's the primary risk management strategy employed by the traditional brokerage community (I'm talking about all those companies on the verge of bankruptcy and insolvency). I guess they forgot to practice what they preach to all their clients. The fact is that diversity is way over hyped. If you're well diversified, it just means you have more stocks that went down this year.
I read a story recently by a very successful investment manager who made the comment, "diversity is for amateurs." When I meet very successful investors, the majority got rich by making substantial investments in the right sectors or stocks at the right time. They also all practice risk management in every trade they make.
Options will give you a tool to play either direction with limited risk and unlimited potential. This is the single best way to play the bearish side of the market in my opinion. You can also use options to hedge the positions you own in stocks or mutual funds against unexpected drops in value. When these holdings hold their value, the options will help you generate consistent and reliable income from your investments, even if they don't go up in a value.
The wide range of index and sector ETF's now available offer so many advantages over picking individual stocks that I'm amazed anyone buys individual stocks anymore. If you can spot a trend, you can pick an ETF to play it. If you want a little more leverage, you can now find an ETF that offers 2:1 leverage to play the market in either direction. Check out the QID and QLD for the nasdaq and the DIG and DUG for oil. If you use these vehicles, you can always invest in something that's going up.
So spend a little time and money and learn to trade options and ETFs. You won't be able to survive in the future economy without using these powerful tools and strategies. They are some of the most efficient vehicles for investing available. They are almost universally easy to use, and cheap to trade when compared with traditional stocks and mutual funds.
3. Stop listening to your broker and financial advisors and take control of you own money. I have a saying and it's that, "nobody takes care of Ross' money like Ross." It's the rare exception when a broker or financial advisor will actually watch your account and make the recommendations to sell or change strategy when the market trends change. They are taught to get your account so diversified that you won't get the best of the rallies, but you'll avoid the worst of the sell-offs. The goal of traditional portfolio diversification and management as taught by the major brokerage firms is simply to get you to the point where you don't feel the need to call your broker every day to talk about your investments. They simply don't have time to talk to you because they are too busy trying to raise more money to increase their assets under management. That's all that matters in their world. Their education is limited to asset allocation models and portfolio diversity. Most brokers couldn't recommend an individual stock or ETF to save them. The fees you'll pay are not in line with the value you receive.
Get an education if you need one and take control of your own money. You'll be happy you did.
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