My 7-point Investors Survival Plan
With almost unprecedented volatility continuing in world markets this month
, the questions going through the minds of most investors now, especially the small guys like us is how do we hang on to what weve got? When even supposedly safe investments like gold can get hit by almost 16% in a month, is there even such a thing as a safe haven investment and shouldnt we just throw in the towel and rely on cash savings to fund our retirements? Heres why you shouldnt:
The first thing you have to take into account as an investor is the economic and political background against which youre making your investments. Are we in a recession or a boom? For example, if things are booming, you might want to take some risk off the table and sit in cash for a while. On the other hand, if were mired in recession, it might be time to take a contrarian stance and pick up a few promising-looking shares for the long-term.
As for the political background, try and work out how your average politician is likely to respond to various economic scenarios. This isnt as difficult as it sounds when you realise that politicians will always do whats right for their own political survival, not whats right for the long-term economic well-being of the country. Rather than confront the root cause of a problem, the politician will always go for the short-term, quick-fix solution. Very often, of course, theyre simply doing what we demand of them and telling us what we want to hear. Lets face it - an honest politician is very unlikely to get elected.
So if we apply this political mindset to managing the economy, rather than impose painful spending cuts on their electorate, the average self-serving politician will always prefer to kick the can down the road until after the next election and paper over the cracks with more borrowing if at all possible. Thats what theyve done in the UK and elsewhere since World War 2, and thats what theyre continuing to do now. Despite all the headlines you may read about spending cuts, the UKs national debt is actually increasing. Just like crack cocaine addicts, politicians like to rely on increasing debt as a quick fix for jump-starting economic growth. The trouble is, this approach is now failing: just as with crack, each hit of debt has less and less of the desired effect and weve now reached the point where our economy is sinking into a debt-induced coma.
You must remember that the whole concept of economic growth in the Western world has been predicated on the continuous expansion of debt. What makes this economic downturn so different to more run-of-the-mill recessions is that weve actually reached the limits of how far we can expand that debt. During previous downturns, interest rates were cut, more people borrowed, debt expanded and off we went again as the next financial bubble was inflated, whether in tech stocks or property. At the risk of tempting fate, Im going to say that this time its different. The bubble has just burst and our politicians are now floundering because the usual levers they like to pull on in these circumstances dont seem to be connected to anything.
A quick look at the shenanigans in the eurozone is a perfect example of whats going on all the politicians can think of doing is piling debt upon debt to try and resolve their problems with lack of growth. The trouble is, you eventually reach a tipping point where the underlying economy cant support any more debt and increasing debt further actually decreases economic growth the so called debt trap. I believe the Western economies are now hopelessly caught up in this trap.
So what happens next and how should we, as small investors, respond? At the moment, the political response appears confused. Politicians seem to be in a state of paralysis as the rumbling debt train bears down on them. All markets are tumbling, even the gold market. Eventually, though, those survival instincts will kick in and the politicians will grasp for the only thing that stands a chance of saving them - the lever on the money-printing press. As investors all we have to do is position ourselves for that inevitable outcome.
However, the hiatus while we wait for the politicians to do the inevitable is certainly an unnerving experience for us small investors. There are even some conspiracy theories out there (to which Im largely sympathetic), suggesting that the banking elite who fund the political classes are urging their stooges to hold off from more QE (or money printing) for a little longer until stocks and commodities have had a chance to fall even further. After the dust has settled, the banking vultures would then be ideally placed to feast on the remains of the small investor and pick up a few more bargains.
Whether or not you believe in conspiracy theories, sooner or later the printing presses will run, have no doubt. When that moment comes, if youve sold your gold and commodities and taken refuge behind a wall of cash, the bankers are going to huff and puff and blow you away. I know its difficult when you look at your stock-broking account and see large chunks taken out of it each week (although if youve followed the Hands-On Investor portfolio advice youll have suffered less then most), but if you dont want the bankers to print your wealth into oblivion, youve really got to swallow hard and come out from behind the sofa. You just have to be right and sit tight no matter what.
And to help you do that, Ive jotted down a few practical steps you can take to get you through this volatile period without losing your sanity or your dosh. Allow me to present to you below, my 7-point investors survival plan especially tailored for these turbulent times. Follow this plan and I guarantee youll emerge from the other side of the storm with finger nails in tact all the better for sticking two fingers up at the bankers! Enough of bad metaphors heres what to do:
1. Take a portfolio approach. Quite simply this means spreading your risk across a range of assets but only those assets which are likely to increase in the long-term against the prevailing economic background (see above).
2. Invest in out of favour high yielding shares. High yielding shares that can sustain their dividend payments are far more stable in volatile markets than growth shares. Utilities, pharmaceutical and telecoms stocks on high yields (at least 4%) also tend to increase their dividends above inflation over time. Hold on to these for 5 years or more and fluctuations in capital value tend to be less and less of a concern (although the capital value of these companies also tends to increase over time so you end up with the best of both worlds). Just remember that with shares, its important to set a trailing stop loss (from the most recent peak in price). The shares of a badly managed company can go to zero, so you want to protect yourself against the human factor.
3. Invest in commodities. Unlike shares, commodities like metals, oil and food cant go to zero. Bearing this in mind, and also bearing in mind the hyperinflationary backdrop against which were likely to be investing sooner rather than later, I dont feel the need to set a stop loss when it comes to commodities. Yes, I may take a big short-term hit, but I know that those self-serving money-printing politicians will eventually come to my rescue. Dont forget that the bankers are eventually going to pressure the politicians into inflating (after having bought up lots of commodities themselves first) and you dont want to be without your hard assets when that happens.
4. Invest in gold and silver. I make a distinction between gold and silver and other commodities. In fact, I dont view them as commodities at all. I view them as an alternative currency, i.e. money. Yes theyve taken a big hit this month along with everything else, but because I believe theyre actually safer havens than cash in the long term, Im taking this opportunity to buy more at these fire-sale prices (see this months portfolio update).
5. Have patience. As I said above, you have to be right and sit tight. Have confidence that youve positioned yourself correctly for the long-term and ride it out. Dont sell anything, unless its a share thats reached your trailing stop loss. I tend to use quite a generous 25% stop loss as I find Im not bounced out of a good investment too easily. After all, why give up on a good quality asset without a fight.
6. Have some cash in reserve. Yes, eventually cash will be trash as the bankers try and print you into oblivion, but in the short to medium term, youll need a cash reserve for emergencies, to keep you sane when the market takes another lurch downwards and to pick up a few bargains as and when opportunities present themselves (see point 7 below).
7. And finally follow Warren Buffets advice and be greedy when others are fearful. When politicians and bankers dissemble by pretending theyre going to let a deflationary crash overtake us call their bluff! Use a bit of your cash reserve to pick up a few bargains as and when the market offers you a fire sale price on a great long-term asset (like it just has now).
So here endeth the lesson. I hope youve found it useful and if you put it into practice Im sure it will help steady the nerves a bit at times like these when the stock market bear comes a growling. Just hang in there because now is not the time to throw in the towel.
Until next time, Happy investing.
John Mac, The Hands-On Investor.
Buy gold online - quickly, safely and at low prices
by: John McDonald
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