Comments on Recent Developments
| Some Practical Advice I have no idea what's going to happen over the next few weeks and months, but the following advice should apply regardless of how things turn out. (1) Live within your means - If you're currently spending more than you make, then you need to make a choice before that choice is made for you (see #1). Here's the choice: You either need to make more money, or spend less. Cutting back on expenses is easier, so I'd suggest starting there. Getting another job is harder than cutting expenses, but it might require a combination of both. It's actually pretty simple to tell if you're spending more than you make. If your debts are rising and/or your savings are decreasing, then you make less than you spend. If your debts are decreasing and your savings are not, then congratulations! You make more than you spend. (2) Create a savings plan - If you spend less than you make, then this shouldn't be a problem. A common plan of attack is to set up automatic transfers from your regular account to a dedicated savings account. Professional planners often recommend that you have 3-6 months worth of expenses in your savings, which should benefit you in case of an emergency. Make sure that your savings account is insured by the FDIC. And if you're worried about your money losing value, then consider buying some gold and silver as a hedge. If you're one of the few who feel that saving is unimportant because you have lots of credit available to you, then you're far too naïve and complacent in financial matters. Here's my prescription: Seek out the advice of someone who's over 70 and listen to what they have to say. History is the best teacher in all things financial, and the older generation has seen plenty of it. (3) Pay down high risk debt - I consider high risk debt to be high interest and variable rate debts. Variable rates will go up once the current rounds of rate cuts is over. High interest is a burden no matter how you look at it. I wouldn't suggest aggressively paying off the average home or car loan, which tend to have low, fixed rates. However, credit cards and the like can get quite expensive! One more bit of advice: Don't go crazy with this, especially if you can't afford large payments. Instead, create a sensible debt repayment plan and be consistent. The following Debt Reduction Planner can help: http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp (4) Understand yourself - The first thing you need to do is understand which kind of investor you are. By definition, long-term investors buy and hold for many years. Traders, on the other hand, invest for short-term profits and ought to use strict rules or systems to limit losses. The biggest problem I see is that people start out as long-term investors but then act like (bad) traders after they suffer losses. Specifically, they "hold for the long term" as markets go up, but they then sell in a panic when markets drop. True traders and long-term investors wouldn't be rattled by sharp declines. The former would use stop loss orders and the latter would simply add to their positions on declines. (5) Understand your investments - For traders, this is quite simple: learn to trade! Environment (usually) means very little to traders, since an experienced trader can make money in any market. If you're interested in learning how to trade, then I'd suggest getting a good book on the subject. Amazon.com has useful book reviews and ratings, so you might start there. For long-term investors, however, environment is everything. In a recent article entitled Investing for the Long Term, I make the case that buy-and-hold investors should only invest in secular (long-term) bull markets. What's the point of throwing your money into a sector or industry that's bound to under-perform or decline in real value for the next 10 or 15 years? History is the best guide in making these decisions, and history repeats itself. If you'd like to become a better long-term investor, then I'd suggest you start by reading that article. What I'm doing At the moment, my trading account is 100% in cash. I don't think we've seen a bottom yet, and I'm hesitant to play the short side at the moment because of the rocket rallies we've been having. This is a market for day traders, and it's not a market where I'm comfortable holding a position overnight. News is driving this market, and it's all about whether the next bailout succeeds or fails. If the bailout ultimately gets the votes, then I'd expect the market to rally for a little while. I'd likely short the rally once it peaks because I'm sure we'd see new lows after that. This bailout will only prolong this bear market and won't provide any lasting relief. If the bailout fails a second time, then I'd expect another severe sell-off, which might purge the market enough to bring an end to this bear market. Now just to be clear, I'm talking about the end of the cyclical bear market (the one that started in January), not the overall secular bear market. That bear market will likely continue for years to come. However, it doesn't mean we can't have a profitable short-term bull market in the meantime. A sharp sell-off would likely be followed by many months of choppiness before a real rally could take place. In short, a panic selling event is exactly what this market needs in order for this bear market to end. Government bailouts just prolong the process. My other position (other than cash) is physical precious metals. The current shortage in gold and silver bullion suggests that others have been preparing in similar ways. I'm still waiting for silver to be delivered that I bought in August, and others are experiencing similar delays. If you've looked for physical silver recently, you know that you either need to pay a high premium or you have to wait a few months for delivery. Not ideal, but I'm glad I bought beforehand when nobody wanted the stuff. The spot price of gold and silver are down again this morning, so we might get yet another buying opportunity soon. The current market situation is a challenge for most people. If you're sitting on losses, you're certainly not alone. There are no easy decisions here, but good luck with the ones you make! **************************************** To sign up for our FREE EMAIL NEWSLETTER, visit our main page at http://www.HomemadeInvestors.com. Disclaimer: Homemade Investors is published by Homemade Investors LLC. The information contained in this article does not constitute personal investment advice and is not designed to meet the personal financial needs of any individual. Investors should seek advice from a qualified investment advisor before entering into any transaction. The information contained in this article is deemed reliable but is not guaranteed. The information and opinions contained in this article are subject to change without notice, and there is no obligation to update such. To republish this article, visit http://www.HomemadeInvestors.com/reprint for guidelines. © 2008 Homemade Investors LLC. All rights reserved. |
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| by Daniel R., Homemade Investors Thursday, October 2nd, 2008 When stocks fall in a bear market I've mentioned this several times in the past couple of months, but it's worth repeating until it's over: We're in a bear market here, and bear markets go down. That's just what they do. Specifically, we're in a cyclical (short-term) bear market within a secular (long-term) bear market. That makes things extra bad. For traders, cyclical bear markets are for shorting (unless you're sharp and fast moving). For long-term investors, secular bear markets aren't good for anything but losing money, unless you buy the right stocks. So if you're looking for advice about what to do with your stocks today, I have none. That's not particularly helpful at times like this, but I don't know your personal situation and I certainly don't know what this market is going to do in the next few days and weeks. What I do know is that it helps to make these kinds of decisions early, before big declines happen. Rather than giving you stock market advice that may become obsolete in a week or two, I'd rather give you something more lasting. So, I came up with 5 pieces of practical advice. |