5 Ways to Turn a Fiscal Cliff Into an Investment Opportunity

by Keith Fitz-Gerald | November 21, 2012 10:00 am

Many investors believe that a fiscal cliff  “dive”[1] is inevitable. Even with the prospect of a deal lifting the markets Monday[2], I can’t say I disagree.

The blame game has already started and it’s highly unlikely that we’ll see anything other than more foolishness out of Washington. And so far all they have done is kick the can down the road to date.

So what can you do about it? Believe it or not, crises like these can be an ideal time to buy stocks. And gold. And oil. And certain kinds of bonds. And more.

The death of financial markets[3] is almost always highly overrated.

Adding insult to injury, fiscal cliff or not, trying to time the markets is an exceptionally bad idea – 85% of all buy/sell decisions are incorrect, according to Barron’s. Further, Dalbar data shows that the return of an average investor trying to time the market is a pathetic 1.9% per year versus the S&P 500 return of 8.4% over the same time period.

Over 20 years, that’s the financial equivalent of taking a 342% hit in lost performance.

With that in mind, here’s a five-point plan for turning the fiscal cliff into an outstanding opportunity.

1) Get ready to go bargain hunting

With Europe entering another recession and some parts of the world flirting with a protracted slowdown that’s going to be more like a managed depression, things couldn’t be more uncertain.

While I don’t personally like this reality any more than you do, from an investment perspective I’m very happy to pick through the oversold stocks and go bargain hunting.

Why?

Because history’s rearview mirrors show that fear, panic, crisis and stress are all classic signs associated with opportunity — and profits.

This is particularly true for choices related to energy, resources and certain kinds of technology – all of which the world needs, as opposed to wants, and all of which are backed by billions of dollars flowing their way whether we go over the fiscal cliff or not.

2) Stress test yourself

Never mind the big banks or Wall Street’s hooligans, take a good hard look in the mirror.

Many investors are completely unprepared for the psychological impact of our nation going over the edge. And you don’t want to be one of them.

Read the fine print on your brokerage statements. Imagine what would happen if the markets drop even further. Are you prepared to go on the offensive? Can your portfolio handle a stock market plunge, or will you be left grasping at straws when the smoke clears?

Focus any discomfort you feel into something productive, like realigning your expectations, your portfolio and your investing tactics so you can capitalize on the opportunities a fiscal cliff dive will create.

The 50-40-10 model I recently addressed with US Global (NASDAQ:GROW[4]) CEO Frank Holmes is a great place to start because it ensures a constant blend of safety-first choices, discipline, and upside.

3) Decide under what conditions you will sell.

Many people assume that we will wake up one day and somebody will announce that America’s gone over the fiscal cliff.

I don’t think that’s the case. The markets are already adjusting to that possibility and, while panic hasn’t set in, it’s only a matter of time if our leaders can’t get their act together.

When that happens, the last place you want to be is standing on the sidelines wondering what to do.

Decide now — ahead of time — under what conditions you are going to sell and why.

Your decisions can be part of some elaborate plan or as simple as a 25% trailing stop. It really doesn’t matter. That you are prepared ahead of time does.

This strikes some people as defeatist. That’s nonsense. No investor has to suffer the ravages of a bear market if they’ve prepared ahead of time.

4) Make consistency your mantra

Despite unbelievably challenging fundamentals and more than 12 years of disjointed markets, many investors remain hypnotized by the promise of buying something cheap and having it turn into the next Google (NYSE:GOOG[5]), Apple (NASDAQ:AAPL[6]) or Amazon (NASDAQ:AMZN[7]).

This baffles me but I can understand their thinking. You’ve probably heard as many stories as I have over the years of people who have “made it big” buying some obscure company that turned into a gold mine. The greed gland is pretty powerful.

Just remember that huge profits come with huge risks. What people don’t talk about is the fact that many of the most famous traders of our time  — guys like Rogers, Soros, and Paulsen for example — work with huge amounts of capital and leverage.

Unless you are prepared to accept the risks like they do as part of a carefully disciplined overall investment plan, don’t play the game. Volatility is not for the faint of heart.

For everyday investors, the real path to financial freedom and success over time is through smaller, consistent winners and making fewer mistakes.

This speaks to an investment philosophy grounded in strategies with higher probabilities of success like an emphasis on income and total returns, fortress-like stocks with “glocal” capabilities, put selling, resources and disciplined risk management.

5) Recognize that not all risks are the same

Wall Street’s lawyers love to point out that all investments involve risk. I agree. But that’s only half the story. What they don’t tell you is that not all risks are the same.

That’s why we prefer large “glocal” companies that are generally characterized by globally recognizable brands, have fortress-like balance sheets, and have long histories of raising dividends over time.

That’s not to say there isn’t a place for small cap stocks in your portfolio at the moment. There is — especially when you can identify a specific catalyst for future profitability like a patent or innovative game-changing technology.

My favorite small caps right now are related to medical, bio, and defense tech. All three segments are game changers that quite literally could affect millions of people and produce some outrageous returns, too.

Just keep the risks in line with the rewards.

Endnotes:
  1. fiscal cliff  “dive”: http://slant.investorplace.com/2012/11/fiscal-cliff-fearmongering-more-experts-say-well-be-fine/
  2. lifting the markets Monday: http://investorplace.com/2012/11/apple-and-housing-raise-the-bar-mondays-ip-market-recap-aapl-sbux-gmcr-intc-gs/
  3. death of financial markets: http://investorplace.com/2012/11/equities-still-a-retirement-portfolios-best-bet-ko-jnj-lmt-intc-ivv-iyw/
  4. GROW: http://studio-5.financialcontent.com/investplace/quote?Symbol=GROW
  5. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  6. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  7. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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