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That two most pressing questions for investors right now are: What’s going to happen next? And what should we do about it?
Although pundits are spewing forth about an "improved" outlook for the U.S. economy, history tells us that we’re more likely to see a stock market correction in the near term. During the last half a century, stock market rallies that follow horrific declines like we’ve seen in the past 24 months are typically followed by a secondary decline of 14% to 50%. (See 10 Reasons the Market Could Crash in October.)
What will happen after that is anybody’s guess. According to a study by Ned Davis Research, any secular bull market that followed a recession in the last 100 years resulted in gains in excess of 60% during an 18-month stretch. In situations where that rally was actually the catalyst for a resurgent economy, stocks averaged 110% over the next 36 months.
But we also have to remember that the bear market that started all this grew out of the worst financial crisis since the Great Depression.
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Hope for the Best, Prepare for the Worst
According to longtime investor Jeremy Grantham, the record deficits, stimulus packages and bailout packages have "reduced to guesswork" any market forecasts (as reported in CNNMoney). That’s probably why Grantham recently warned clients: "If you feel overconfident about anything, take a cold shower and start [analyzing] again. Just be patient. In our strange markets, you usually don’t have to wait too long for something really bizarre to show up."
I’ve been counseling readers for more than a year to think long term. My advice is to preserve your wealth by navigating the near-term chaos. Stifle the knee-jerk urges to buy or sell. If you succumb to the urge to follow the herd, the crowd will inevitably lead you down the wrong path. And probably at the worst possible moment.
Instead, you should follow these five strategies:
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#1 Position Your Portfolio
Develop a portfolio structure you can live with, such as the 50-40-10 allocation model we recommend in The Money Map Report — 50% in conservative investments, 40% in global growth and income plays and 10% in speculative stocks. That way you can take all sorts of economic contingencies into account, while still maintaining a steady course that emphasizes sound "safety-first" choices, portfolio stability and high income.
How much stability should you be looking for? Our 50-40-10 model is typically 30% less volatile than the broader markets. But it can dramatically outperform the broader indices on the upside. Not only is this mix time-tested and battle-proven, it ensures that we always have the right mix of conservative holdings and aggressive profit plays — no matter what the overall market happens to be throwing our way.
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#2 Limit Your Losses
Invest no more money than you can afford to lose. This sounds simple, but you’d be amazed at how many of the thousands of investors I’ve talked with through the years still don’t get it. They view themselves as "investors," when they’ve actually become "speculators." One man I know lost half his wealth during the past two years. When I asked why he’d put so much money at risk, he shrugged and replied: "Because I could."
Get your strategy in place then pick specific investments that keep you within the guidelines you established. Focus on global stocks with high dividend yields. And make sure you include a healthy dose of energy, technology and inflation-resistant holdings. Such stocks tend to blossom at the first signs of a real recovery — just like they have after every other documented economic downturn in history. And, finally, always make sure to manage your risk.
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#3 Avoid Surprises
In my talks with audiences all around the world, listeners are often the most surprised to learn that successful professionals don’t wake up with thoughts of how much money we can make each day. Instead, we think about two things from the time we get up until the time we go to bed:
What’s the most likely thing that could cause me to lose money today?
And how can I avoid that?In other words, concentrate on understanding what it is that you don’t know. And then make sure to steer clear of that potential pitfall. It’s an approach that helps you make better decisions. Don’t swing for the fences and risk a strikeout each time you come to bat. Instead, make up your mind to go for much-higher-probability singles and doubles. Risk aversion should be your new mantra, especially now.
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#4 Risk Less — By Saving More
This is actually a neat little trick. Classic market theory holds that to generate bigger returns, you have to have to take on more risk. That’s true — as far as it goes.
But here’s what that adage doesn’t address: By taking some simple steps to save more, you can actually accumulate wealth more quickly than by the increased levels of risk most investors are relying upon at the moment.
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#5 Don’t Let Yourself Get Whipsawed Out of the Market
Investors who prepare for only one kind of market are the most susceptible to panic selling. To them, investing is an all or nothing proposition. You’ve got to prepare for both up and down markets. And you do so with some simple hedging strategies.
Hedging, after all, isn’t just for hedge funds. In fact, everyday people just like us can use them very effectively. You see, if you’ve prepared for up and down markets, you no longer have to actually "predict" what the markets are going to do. Then you can focus on finding quality companies with real earnings, a healthy dose of overseas sales and high income.
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Go Forth and Profit
Once these five strategies are in place, you can turn your money loose to do the work it wants to do for you.
And you can sit back and enjoy beating the so-called "smart" money — practically no matter what the stock market does next.
See also:
- Top 9 Stocks to Trade This Fall
- 10 Sectors That Could Use a Bailout
- 9 Ways to Profit From the Market’s Fall
This market is packed with opportunities to make big money… if you know where to look. Find the hidden money-doublers in today’s stock market. Learn more here in your FREE Options Report.
