Editor’s Note: This article is adapted from Keith Fitz-Gerald’s new book Fiscal
Hangover: How to Profit From The New Global Economy.
The market has taken investors or a roller-coaster ride in the past two years, and they are no doubt more skittish and unsure of themselves than
they were not so very long ago. With all the financial woes in the global economy, the worst thing you can do right now is “freeze up.”
I understand that after living through a stock market crash as severe as the one we experienced in 2008, followed by a monstrous rally on questionable
fundamentals, it’s easy for investors to allow their emotions to get the best of them. But that’s when the smallest mistakes turn into the biggest
There’s one antidote for this problem: remembering a few basic rules. If you embrace the 10 investing tips I’ll lay out for you here, I think you’ll
be in line to make some serious money in 2010.
Rule #1: Invest on the Right Side of Major Economic Trends
That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult
to sustain — unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks
in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite
the government bailout and federal stimulus efforts.
Make sure to analyze all of the other major global trends, as well, and ride the ones that are truly unstoppable. You’ll know them when you see
them, because they’ll have trillions of dollars in new capital flowing directly at them. Investment plays in such areas as infrastructure, inflation,
energy, food and water (both supply and purity) are great examples.
Rule #2: Sell Your Winners
This may seem counterintuitive but, if you want to succeed, you must sell your winners. Preventing losses is only part of the success equation.
To be really effective, you have to take profits, too. That way, you get more capital that you can put to work.
Think of it this way: The grocery store regularly replenishes the inventory in its produce department to keep it fresh. You should do the same with
the “inventory” in your portfolio, because if you let your stocks sit on the shelf too long, they’ll eventually go bad — just like fruit that’s past
its expiration date.
Don’t gamble away your profits. Learn when to
exit a trade.
Rule #3: Always Sit in an Exit Row
This rule goes hand in hand with the last one. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let
a big loss get out of control, or worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss.
The bottom line is that, up or down, you should always have planned exit points when you initiate a position, and enforce them with protective stop
losses, adjusting them as prices move in your favor (but never when they go against you).
Rule #4: Your Broker is a Salesman
So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and
one reason only: to sell you stuff and make money … from your money. And the more of your money you give to them, the less you have to make
more for yourself.
So buy only what you want and what fits your goals and objectives — not the “stock of the day” the broker is pushing to meet his or her weekly
Rule #5: Invest for High Yields
Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can
find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform
so-called “growth stocks” by as much as 22-to-1.
Furthermore, dividends account for a huge percentage of total returns. Varying studies have claimed anywhere from 60% to as much as 97% over time.
So don’t ignore them!
Rule #6: Think Like a Plumber
Big losses — like six inches of water in your living room — are expensive and can set you back years. Professional traders — and I’m not including
the risk-junkie cowboys who drove the derivatives mess to hell in a handbasket — understand this. And because they do, they focus the majority of
their efforts on avoiding losses, instead of only capturing gains.
It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about
your assets leaking away, drip by drip.
Rule #7: Buy Value
Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard
to make money when valuations as reflected by price/earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range.
However, to really make money, you need to buy when valuations have been beaten down into the single digits — assuming, of course, that the company’s
underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.
Rule #8: Retirement is a Lifestyle Issue, Not a Monetary One
When most people think about retirement, they think about safety. Big mistake.
The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed my next rule on this list (hint:
start early and leave your money alone for as long as possible), this shouldn’t be a problem.
However, if you’ve thought about safety and haven’t invested enough, what you’re really doing is crippling your ability to earn future income —
income you’re going to need in order to eat, keep a roof over your head and provide lifelong health care. Oh yeah, and have some fun.
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Rule #9: Start Early and Leave Your Money Alone For as Long as Possible
This is not the same thing as “buy-and-hold” investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick (and these days it’s
more like “hope-and-pray” investing anyway). The world’s most successful investors — think Jim Rogers, Warren Buffett and the late Sir John Templeton,
to name a few — don’t buy and hold. And I don’t believe you should, either.
These experts “buy and manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical
objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life
as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash
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Rule #10: All Investments Contain Risks — But They Don’t Contain the Same Risks
Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable.
Every investment involves risk — the only questions are how much and under what circumstances. Remember, success is not about how much money you
can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.
The late legendary U.S. Army Gen. George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite
different from being rash.” I completely agree. I also think you have to take a certain amount of risk to be successful. Yet, most folks are unwilling
to do so — or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these
investors actually set themselves up for failure — not because they take too much risk, but because they don’t concentrate the risks they do take
in the right places! What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor
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