How to invest when the world is in chaos
As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
By Aaron Katsman, MarketWatch
I can't begin to tell you how many of my clients believe that we are approaching the end of the world. Well maybe not that extreme, but as the geopolitical situation the world-over spins out of control, investors are questioning how best to position their investment portfolio for the global turmoil.
Syrian genocide, Iranian nuclear proliferation, radical Islamization of Iraq, ISIS and the strengthening of radical Islamist terror groups, Ukranian pro-Russian separatists shoot down a Malaysian airliner, massive but little reported human rights abuses in Venezuela, the sieve that has become the U.S. border and other issues — and let's not forget that the global economy hasn't rebounded from the financial crisis of five to six years ago nearly as strongly as anticipated.
Throw in daily headlines about how the U.S. stock market is so high a crash is imminent, and it's no wonder that investors are nervous. What should investors do?
Stay the course
My advice? Do nothing. Just stay the course and follow the investment plan that you have created.
The world has always been a very dangerous place, pundits have always been calling for market crashes, and most of the time the market moves higher. I have had many clients over the years that try and maneuver their portfolios based on political events and how the anticipated events would play out. More than once the client was correct in the prediction but the portfolio used to try and profit from the events dropped anyway.
Let's look at the local Israeli market as a perfect example. During the recent summer military altercation with Hamas, with two-thirds or Israelis spending time in bomb shelters and productivity at work rather low, conventional wisdom would suggest that the Tel Aviv Stock Exchange (TASE) should have dropped significantly and the Israeli Shekel should have gotten hammered.
Go figure but the Tel Aviv 25 Index moved higher during the war and the Shekel strengthened (it has since weakened as the U.S. dollar has spiked against all major global currencies). The exact opposite of what any sane person would have thought the outcome would be.
Just like in Israel, the U.S. markets have continued to gain and the currency has strengthened in the face of all these issues.
Market crashes generally happen without warning, and are not usually telegraphed.
While I believe that most investors should just stay the course and do nothing, retirees are different. For retirement investors that don't have a large net worth and can't afford the possibility of a 20 to 30 percent loss, pragmatism should win out.
For these investors, we may be entering a period where capital preservation takes precedence over capital appreciation and they should make some changes in the way their portfolio is allocated.
I say this for two reasons: 1) They don't have the luxury of time on their side and the ability to rebuild their wealth in the event of a market drop and 2) because the most important aspect to investing is being able to sleep well at night and not be nervous that a sudden market drop will wipe out your savings.
For these investors it pays to lower stock exposure. If you're worried that the cumulative effect of all these events portend an imminent market crash, than just sit in cash, and take a wait-and-see attitude. I don't believe that it is necessary to try and profit from a potential market drop, because if you are wrong, you are going to lose money, and that's precisely why you sold your stocks in the first place. No need to be a pig, just have some patience and then reinvest.
It will drop
Let's say you disagree. Now what? For those investors hell-bent on trying to time a major market drop and profit from it, the classic way to play a market drop is by buying put options.
A "put" is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. A put option is basically a bet that the market will drop. If it does, the investor makes money. If wrong, the initial investment in the put is lost.
Options can be quite complicated, and should be understood before being used. If you are worried about a market decline, speak with your financial adviser to coordinate how best to position your portfolio.
More from MarketWatch
President Obama will appear on all TV channels tonight and address the nation from the oval office to announce a continuation of the biggest welfare program in the history of the world, the centerpiece of his economic program. He will guarantee to prop up the stock and real estate markets and outline the exact timeframe in which he will order market interventions to drive the dow to 18,000, 19,000, and the coveted 20,000 level. His over-riding message is that there is no risk to the markets, and to assure that markets will not go down for "a considerable time". He will outline how his policies have resulted in a massive giveaway to the filthy rich fat cats as well to corporate America, especially the bailed out banks, in case there is an American left who doesn't understand this. And he will describe how all of the phony wealth and money that was created and given away, will directly compete with the dollars that common Americans get for the work they do. He will not rule out airstrikes or take anything off the table to keep the markets pegged at the desired levels, or to achieve any other result he deems necessary.
One of the biggest lessons from the Great Recession, Folks haven't learned a darn thing about excessive Debt and Leverage. That's what caused the Great Recession and since that's at least 40% greater then during 2008, the Fallout this time around will be far worse. Especially since we never even fixed the original problems. Especially since the same Bad Players are doing the exact same things which caused the last Global Recession.
That's why Capital preservation takes precedence over capital appreciation regardless of your age. When Global Debt and Leverage is this BAD. Why ride the Markets Up, then Down, then hopefully back Up again all on the Wing and a Prayer that the Global FEDS will bail you out again with more Welfare created via more FAKE Money. Because that's exactly what most folks are counting on. Locking in profits along the way is what the Top 1% of the Top 1% have always done. Yet you will always find the shysters telling everyone just the opposite.
Until our Debt and Leverage issues are fixed, Buying and Holding to Infinity is DEAD. However the folks that want to be stubborn about it, at least find Quality companies that pay a Solid/Quality Dividends so that at least you get paid while you wait. Don't let GREED get you sucked in nor all the HYPE in the High Flyers. Don't every marry those stocks. Take your profits.
Saving for Retirement isn't some Race or some contest, sometimes it's just best to be happy with what you have already recovered (plus) since the Great Recession or run the real risk not having anything at all. Greed or some farce stay the Course Jazz can wipe you out. Why run the real risk of starting all over again.
This isn't a Fresh Bull, it's a Old one. So don't be fooled by the Blowout Tops we always see before they end. You don't wait until the very end where it's Clear to all to prepare for the eventually turn in Markets, you start weaning your way out along the way. Then when the next massive BEAR actually does come, for you it's a freaking Garage Sale for Stocks.
Sadly, far too many folks didn't get Stronger nor Wiser since the Great Recession. However far too many have resorted to the same Games and foolish ways of the past. That will just make the imminent Day of Reckoning that much worse and cause it to last far longer then in the past. The ultimate Tale will be start of massive Defaults of Debt across the Globe. Up to this point, the Central Banks have masked these problems and prevented the Flood Gates from opening. They can't do that forever. And they never have.
YAWN....Us old timers grew up in the midst of the cold war; we practiced regular nuclear bomb drills hiding under our desks (as if that would do any good) or marching into the basement. In the space of just six years we lived through the Cuban missile crises, the assassination of a President, his brother, two major civil rights leaders and God knows what else that was never reported. Our parents didn't worry much; these events were miniscule compared to what they lived through.
Practice age appropriate asset allocation and go back to napping. The world will take care of itself.
In a word.... GOLD. Understand Gold is not an investment. It is a store of wealth. Take a look today who is buying gold. Million and Billionaires. In huge amounts and large bars. When the likes of Soros buys 100,000 of physical gold, he must know something.
Maybe he has zero faith in the dollar. Maybe he knows deep down what Obama and the democrats are doing to the American economy.
I agree....Gold is not a true investment, but much more a trade. Such as many commodities.
But Gold is one to it's own...Even more so, than most other PGMs or Precious metals.
Also a store of wealth, which it has proven throughout the Ages.
And it has been more beneficial to the "very wealthy" and elite, than the commoners...IMO.
The only thing I see that matches it's allure at times, is Good clean WATER...
Strangely something of little cost, that can have so much value; That we take for granted.
Havey...Safe money, safe money.
Would not attempt to fault your investing or savings, we all have our reasons or a plan..?
But a gain of 32% since 2009; Maybe even Mar-Apr. 2009, did you mistype ??
That is roughly 7-8% per year ? And very conservative.
The Markets have done extremely better since then.
This is not bravado, only my plan...And I'm not trying to be condescending...please.
My wife's investments, mostly CD's and savings, beat the hell out of me in 2008. The only time.
Our/my Wall St. investments were totally recovered by late July 2009.
As of about end of August, we have appreciation and dividends of over 300% or 60%+ per year.
A couple of those years we withdrew money, remodeling home and/or bought a new vehicle..
The last 3 years or so, every dividend has been reinvested..
I am a Trader, and take profits and reinvest occasionally..(including dividends).
And we have also had losses on investments sometimes...I'm being honest, as much as I can.
And we buy and hold also on some positions...Usually things like MICK mentioned.
It is not always easy, sometimes luck; And I spend about 10-15 hours a week doing research.
A rewarding hobby, that is paying off for now, as a second job after retiring 16 years ago.
I am a self taught, and a self directed investor; Have not had a Broker or FA since about 2001.
My biggest contribution would be, all investors should be DIVERSIFIED...
It can help in the tough times, and I have studied what I consider to be successful investors.
As Peter Lynch advised in "One Up On Wall Street," a portfolio should built around safe "stalwarts." A good example: General Mills crashed in 2008-9 like almost all stocks but hit a new all-time high by Dec. 21, 2009. People don't stop buying Cheerios, Green Giant, Gold Medal, Betty Crocker, etc. in a recession. That's called a "durable competitive advantage." Even this past week, when drops in cereal buying caused General Mills to drop 4% in one day, it rebounded toward the end of the week and is up 9% on the year, and pays a 3.2% dividend.
In retirement, over 80% of my stocks are in such companies. They'll keep paying me over 3% in dividends (over 4% based on their 2012 values) and if there's a crash most or all will recover within several years.
Isn't Chaos....A State of total disruption, disrespect, and disorganization...?
My definition; Not going to bother looking up, to see what that Webster guy thinks.
We are not at that stage, in the U.S. at this time; And most places around the Globe.
Although we do have pockets of despair...
They are well known.
The_Mick..Those are the"number one things" that many investors don't get sometimes..IMO also.
"Staying the Course", "Have a Plan", "Buy and Hold", "Re-Invest, Re-Allocate, Re-Adjustment",
"The Art of Compounding", " Using DRIP methods", "Due Diligence, and the Art of Trading".
"Bullet Proof, stocks/companies", "Fear and Greed" and my biggy " Diversification".
Some of that sounds a little conflicting, but we have to go along with what works sometimes.?
Great investors and Managers of money, Like Lynch, Buffet, Munger, Soros, The Koch's, and Carlos Slim along with several others.....Did it well, but not overnight.
Taking pages out of their books, can be helpful to any body whomever, that wants to invest.
In 2008 we took a small beating, got a little scared, then depressed along with being mad;
But didn't know who I was really mad at..?? Or who to blame..?
I swore revenge, did adjustments and re-allocations, and rode out the Am-BUSHing we got..
Today I have no regrets, stayed the course, and learned a lot more about investing.
What doesn't kill you, can or will make you stronger and wiser..
It is not easy, get all the ideas and advice from any source necessary...
And never fear the fear....
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