With all the talk about bailouts in Washington and on main street I thought I'd throw out my two bits on the subject. Governments around the world have reacted to the economic crisis by pledging trillions of dollars in corporate aid to shore up the banking and credit markets. Their collective actions are unprecedented in world history. A great deal of this money has already been spent and much more is on the way as soon as details of President Obama's stimulus package are negotiated and the bill is passed.
From where I sit (the cheap seats) it appears that all this money has done little to restore the confidence in the banking and credit systems that are so crucial to our economic prosperity. If people don't trust these systems and start spending money more like they have in the past, there is no amount of money that can make these problems go away. Consumer are the only sure solution, but they won't spend if they lack confidence. Fix the confidence problem, and you'll solve the economic ones along with it.
The wealth that drove the economy higher for the better part of the past 5-6 years was created from easy access to credit. This easy credit helped push property values artificially higher, along with many other goods. Now that the easy money well has gone dry there are far fewer dollars chasing a glut of overpriced real estate and we're seeing the natural correction in prices. The prices of the past couple of years weren't justified and so we've got a painful correction to endure. This correction is impacting people at every level of the economic food chain from the wealthiest to the poorest.
Businesses are seeing the slowdown in spending and trying to stay one step ahead of the correction by laying off thousands of workers to keep their businesses healthy, or at least stable. The dramatic loss of jobs is adding momentum to the slowdown as there are fewer people with money to spend. It's a vicious cycle that seems to be picking up steam rather than reaching the bottom of the hill.
The real crisis we're facing is more a crisis of confidence than a banking or credit crisis. Banks don't want to lend until they know the asset they accept as collateral isn't going to continue to drop in value. People don't want to spend for major purchases, like homes and cars, until they know the prices are at the rock bottom. If we have to keep waiting, the prices are just going to keep falling and the consumers are going to keep holding on to their precious dollars to make things even worse. There are lots of tremendous bargains in the stock market and the real estate markets, but that's not enough to motivate fearful consumer to part with their precious dollars.
So will all the bailout money really help us find a bottom in the economy and financial markets? I hope so, but I'm not too optimistic. Government has never been able to do anything efficiently and I don't think that's about to change. The people who are being targeted for the stimulus package are not those that will use that money to create jobs to help the economy grow, but rather people who will spend that money on basic needs to stabilize their financial lives. Remember those $600 checks that went out over a year ago to stimulate the economy. All that's left from that round of bailout money is the debt that it created for the next generation of American families. Giving away money will never solve the problem. Never has - Never will!
Unfortunately the people who can do the most good to turn things around, business owners and corporations, are about as out of favor as any group of people could be right now. Everyone hates the executives who took the million dollar pay package and flew on the private planes and they want to make them pay. It's a political impossibility to think that these villains will get any love in the upcoming stimulus package. It's simply not going to happen. So fewer businesses are going to be started and fewer existing businesses are going to expand. Government simply can't fill that void. Unfortunately punishing businesses (deserving as they may be) isn't going to help grow the economy or create any new jobs.
The stimulus money will only stabilize things for the short-term and it won't create nearly as many long-term jobs as the politicians want us to believe. Once that fact is exposed, we'll be right back on the slippery slope with one major difference, we won't have more billions or trillions to throw at the problem to fix it.
Let's face it, we have just lived through a period of unbridled excess and we're going to have to pay a heavy price to get things back in line. We collectively broke the first rule of finance, "live within your means."
Gone are the days when a home was your "best" investment. From now on, where you chose to live is a lifestyle choice. The myth that saving a portion of all you earn in a 401k or IRA and investing in a well-diversified portfolio of stocks will get you to a secure retirement has been exposed. Until we as a country come to grips with the fact that we simply can't afford all the government programs our politicians have created to reward their loyal constituencies, we're not going to really fix the problem.
If you want to survive and prosper in these tough economic times, you must take action now. You can't trust anyone to do this for you. It's simply too important to trust someone else to do for you.
I've created a blue print to help you in the form of my new book, The Golden Rules: 7 Steps to a Debt-Free Wealthy Life. It's available on my website at rossjardine.com for half off the cover price (Just $10) for a limited time. Get your copy today and get on the path to a debt-free wealthy life.
Tuesday, January 27, 2009
Tuesday, January 6, 2009
The 3 Fatal Flaws to avoid in 2009
2008 will be a year to forget for most investors I know. With the major market indexes plunging by 40% or more, many investors lost their shirt. I saw a story on the news today recognizing the leading money managers of the year and found it interesting that these managers were winning awards even though their performance in 2008 resulted in their clients losing money. I don't know about you, but I don't find much consolation in "not losing as much" as the major market indexes. A loss is still a loss.
The only investors who made money in 2008 were those that used bearish strategies, like shorting stock and any number of option strategies. This year, more than any in my investing lifetime (0ver 20 years) separated the winners and losers based on strategy. If you don't know any bearish strategies or when to apply them, you lost money in 2008.
So the big question I hear most investors asking now is, "is the worst behind us, or is 2009 going to be more of the same?" Given the unprecedented steps taken by governments around the globe, I wouldn't rule out a quick recovery in the market, but I wouldn't bet on it either. If all the money and credit being pumped into the world economy doesn't do the trick, what tools are left to stop the next meltdown? Not many.
So here's what I think every investor needs to look at if they want to survive and prosper in 2009. I call them the three fatal flaws. Time for a little honest self-evaluation.
Fatal Flaw #1 - No Plan.
Most investors simply have no plan. Ask them to describe their trading or investing plan and they may describe a strategy or two they use, but most simply can't provide specifics in such things and portfolio and trade management, risk tolerance, profit objectives and other very important things.
So to start 2009 off right, you need to create a plan, and it should be written. Your plan needs to specifically define your goals, objectives, strategies, tolerance for risk, profit and loss targets and decision making process. The more mechanical you can become in your decisions, the less emotion will influence them. The hardest part of creating your trading plan is to keep it focused. If it takes you several pages to define these things you're likely not focused enough. Keep it simple applies here.
Fatal Flaw #2 - No protection
If you learned one lesson in 2008, I hope it's that you need to have a plan for when things go wrong. The strength of your emotions will make it nearly impossible to make a wise decision in the heat of the battle (when the market is tanking) if you've not clearly defined those things in advance.
The conventional wisdom of the investment community has always said that if you're well diversified, you can ride out anything. If you believe that, chances are you've made nothing over the past decade, even though we've had two incredible bull markets followed by two painful bear markets. I don't believe buy and hold is the answer anymore. I'm not advocating day trading either, but to survive the volatility we've seen over the past decade, you need to be "actively involved" in your investments. A simple stop loss on each new trade is a good start. The low cost of trading makes it easy to get back in if you get stopped out before you wanted to, but if you set a stop loss point with each new trade you place in 2009, you'll eliminate completely the catastrophic losses that most investors experienced in 2008 for the rest of your investing life.
Think about this. If you took the total amount you lost on your worst trade this year and figured out what percentage of your overall returns you could have saved by eliminating that one loss, you'd likely see a simple way to do 1-2-3% better every year going forward by simply eliminating one catastrophic loss. A stop loss can do that.
Fatal Flaw #3 - No strategies
There's many strategies that will profit in virtually any market condition. The problem is that most investors only know the ones that work when the market is going up. If you've never made money on a stock that fell in value, you've got a great lesson to learn. As you start 2009, you'd be wise to expand your strategy base to include a few bearish strategies. Get a book, attend a seminar or webinar, or hire a personal coach to teach you, but please make an investment in education to expand your strategy base.
I'd specifically suggest learning to use options as they offer investors a simple way to play directional moves up or down in the market with limited risk and unlimited potential. You can also use options to hedge your stock positions against the unexpected. They are not as complicated as many make them out to be.
If you are a victim of any of my 3 fatal flaws, now is the time to take action. I tell people that if they don't what they are doing, it's never a good time to invest, but if they know what they are doing, there is always opportunity in the stock market. Now that interest rates are nearly zero, you're going to need to invest if you want to reach your retirement goals. Your goal should be to learn to make money no matter what the market is doing. It's possible.
Best of luck in all your investments.
Ross
The only investors who made money in 2008 were those that used bearish strategies, like shorting stock and any number of option strategies. This year, more than any in my investing lifetime (0ver 20 years) separated the winners and losers based on strategy. If you don't know any bearish strategies or when to apply them, you lost money in 2008.
So the big question I hear most investors asking now is, "is the worst behind us, or is 2009 going to be more of the same?" Given the unprecedented steps taken by governments around the globe, I wouldn't rule out a quick recovery in the market, but I wouldn't bet on it either. If all the money and credit being pumped into the world economy doesn't do the trick, what tools are left to stop the next meltdown? Not many.
So here's what I think every investor needs to look at if they want to survive and prosper in 2009. I call them the three fatal flaws. Time for a little honest self-evaluation.
Fatal Flaw #1 - No Plan.
Most investors simply have no plan. Ask them to describe their trading or investing plan and they may describe a strategy or two they use, but most simply can't provide specifics in such things and portfolio and trade management, risk tolerance, profit objectives and other very important things.
So to start 2009 off right, you need to create a plan, and it should be written. Your plan needs to specifically define your goals, objectives, strategies, tolerance for risk, profit and loss targets and decision making process. The more mechanical you can become in your decisions, the less emotion will influence them. The hardest part of creating your trading plan is to keep it focused. If it takes you several pages to define these things you're likely not focused enough. Keep it simple applies here.
Fatal Flaw #2 - No protection
If you learned one lesson in 2008, I hope it's that you need to have a plan for when things go wrong. The strength of your emotions will make it nearly impossible to make a wise decision in the heat of the battle (when the market is tanking) if you've not clearly defined those things in advance.
The conventional wisdom of the investment community has always said that if you're well diversified, you can ride out anything. If you believe that, chances are you've made nothing over the past decade, even though we've had two incredible bull markets followed by two painful bear markets. I don't believe buy and hold is the answer anymore. I'm not advocating day trading either, but to survive the volatility we've seen over the past decade, you need to be "actively involved" in your investments. A simple stop loss on each new trade is a good start. The low cost of trading makes it easy to get back in if you get stopped out before you wanted to, but if you set a stop loss point with each new trade you place in 2009, you'll eliminate completely the catastrophic losses that most investors experienced in 2008 for the rest of your investing life.
Think about this. If you took the total amount you lost on your worst trade this year and figured out what percentage of your overall returns you could have saved by eliminating that one loss, you'd likely see a simple way to do 1-2-3% better every year going forward by simply eliminating one catastrophic loss. A stop loss can do that.
Fatal Flaw #3 - No strategies
There's many strategies that will profit in virtually any market condition. The problem is that most investors only know the ones that work when the market is going up. If you've never made money on a stock that fell in value, you've got a great lesson to learn. As you start 2009, you'd be wise to expand your strategy base to include a few bearish strategies. Get a book, attend a seminar or webinar, or hire a personal coach to teach you, but please make an investment in education to expand your strategy base.
I'd specifically suggest learning to use options as they offer investors a simple way to play directional moves up or down in the market with limited risk and unlimited potential. You can also use options to hedge your stock positions against the unexpected. They are not as complicated as many make them out to be.
If you are a victim of any of my 3 fatal flaws, now is the time to take action. I tell people that if they don't what they are doing, it's never a good time to invest, but if they know what they are doing, there is always opportunity in the stock market. Now that interest rates are nearly zero, you're going to need to invest if you want to reach your retirement goals. Your goal should be to learn to make money no matter what the market is doing. It's possible.
Best of luck in all your investments.
Ross
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