You didn’t have to be a mystic to see this market crash coming. Back in August of 2015, I gave our readers tips on how to prepare for the coming carnage. Those of you who listened back then ended up not only riding out the January Crash but may have come out ahead, depending on how far you went preparing for a market meltdown.
For those of you who hung on, we’ve all been there and that’s part of the investing game. We read the same tea leaves and you saw it a different way. There’s no shame in that and the question we all face today is what to do now? The way fundamentals are shaping up, we may be looking at an extended bear market. Even if we slowly crawl out of negative territory, it’s going to be a bumpy, volatile ride. There is nothing on the horizon that suggests there’s much of a light at the end of this tunnel. So, now the question facing us all is how to prepare for a bumpy, volatile bear market?
Don’t Get Completely Out Of Stocks
That may seem counter-intuitive but your stock allocation should be determined by your age and risk profile, not by the ticker tape. There are many good defensive sectors in stocks, like utilities, that hold value and continue to pay dividends, even during down markets. Also, gains in stocks tend to come on just a handful of trading days. If you have no stocks on those few major up days, you could miss out on gains for the year.
Focus On Income
Investments that don’t pay you cash are second rate at best. Growth stocks, that you hope are worth more when you sell them than when you bought them and pay off in capital gains are, in my opinion, a second tier investment. An owner-occupied home, which takes constant infusions of cash, is an expense, not an investment. Understanding that crucial difference is the key to riding out bear markets and getting rich slowly. Dividend stocks, REITs, bond funds and income producing property are all examples of investments that pay you cash. A low fee municipal bond fund will pay you cash every month is a safe and conservative investment. You can opt to have that monthly payment reinvested into the bond fund which then becomes like an income snowball rolling downhill.
The problem with keeping a lot of your wealth in cash these days is that cash and currency are managed by central banks which are run by crazy people. Okay, maybe they’re not completely crazy but there’s no denying that central banks are doing some crazy things like dumping trillions of dollars into the economy through something called Quantitative Easing and experimenting with things like negative interest rates.
There was a time, just a few short years ago, when government bonds paid decent interest, in the neighborhood of four to five percent. Using our definition up above that’s an investment and you could feel good about because, doggone it, you were getting paid cash for investing in America. Today the government has printed so much cash, they don’t need your money and don’t even want your money. Some central banks are going so far as implementing negative interest rates and punishing people for saving cash and the Fed is talking about it!
It used to be that cash in a money market fund was pretty safe but that’s not really the case anymore. Today it’s important to preserve the value of that cash by shifting a percentage of your wealth into liquid hard assets, like high quality gold and silver bullion. That percentage of your wealth will maintain some relative value against whatever diluted paper is passing as currency at the time you need to redeem it. Some investors think gold is a hedge against volatility but it’s really a hedge against the crazy people running our central banks.
Do these things and, by this time next year, you should be in pretty good shape to weather whatever turmoil the markets can throw your way.