Protect Your ASSests

by Scott on August 25, 2010

I always used to get confused when I heard the stock market being referred to as a bull or a bear. It just seemed that if one went eyeball-to-eyeball with a bull or a bear, than that person was essentially screwed. Somewhere along the way I got it that bull= up, bear = down, and a bear market is what we have been in for the last three years.  Well there is a good chance that the bear isn’t done kicking some ass yet and I thought I would do my public service announcement for those that haven’t the time nor inclination to take a look at the market recently.  

Don't let this mofo take your lunch or your money!

I spent eleven years in the investment business and I follow the market daily. Actually the last thing I do at night before checking if the door is locked is to check the overseas markets. I love this stuff, and in my research I assumed we were due for a healthy correction at some point soon. I started getting more concerned the past few months, especially after the “flash-crash” that happened back in May and the fact that volume has been extremely light (meaning not many investors are trading stocks). Now people who are much smarter than me and have a heck of a lot more money than I do, guys like Tony Robbins and billionaire Mark Cuban, are telling people they should get out of the market (see links below). I love Tony’s work, but even people who don’t care for him have admitted that his 15 minute assessment on the economy is one of the best they have seen. What makes a bigger impression on me is that these guys are not putting their opinion out there to make a buck, but they are doing it because they give a crap. Essentially here are the sticking points and why you may consider taking some action:

 – Unemployment refuses to go down and the number of unemployed folks has surprisingly increased the last two weeks. The percentage of unemployed is hovering right below 10%, and this doesn’t include the small business owners who had to fold up shop, the people who can no longer receive benefits, or the people who are under-employed (those with jobs but making less money). Our economy is one based on spending , so this is not good. There has also been a ton of merger and acquisition activity recently, which usually is a good thing, but in this case it could spell trouble. If any of you have been part of a merger or acquisition you know it means job consolidations and cuts.

– Government stimulus and low interest rates aren’t working.  The rate of home foreclosures are increasing again and home sales just dropped to a 15 year low now that the first-time home buyers tax credit is gone.  Banks are stricter in giving out loans and borrowers aren’t borrowing, instead choosing to pay down debt. Not a bad thing at all, but not good for retailers and other businesses. Most of the stimulus programs the government has put forth have acted as  band-aids, but haven’t solved the underlying problems in the economy.

– We are well over a trillion dollars in debt, and there is a fear that higher taxes are inevitable, especially since the Bush tax cuts end this year.  Higher taxes mean less money in consumer’s pockets and less spending. The market doesn’t like uncertainty and hates a decline in consumer spending even more.

– Europe is a mess with countries like Greece and Portugal on the brink of being bankrupt. World econmies are so intertwined now that people are worried what sort of ripple effect would take place with another financial meltdown in any European country. 

There are numerous other factors you can check out below, but the bottom line is that there is a good chance we will approach the July lows in the Dow of around 9600, and if we break that mark then the market could be in some real trouble.  I know some people are worried so I decided to layout some ideas for handling risk.

1. If your nearing retirement or have college money saved for a student in high school then I wonder really consider going to cash for the next few months.  There is always a risk that the market could take off without you, but this would be the “rather safe than sorry approach”. If you need your money sooner than later then there is too much to lose in my mind.

2. Don’t stop contributing to a 401(k) or retirement plan. First it is a great tax deduction, and if you have an employer match then you should take full advantage of it.  However, you can always invest in safer assets like money markets or stable value funds.  One idea is to make the existing balance very conservative, but to make  future contributions more aggressive.  This way you could be buying more shares if the market drops.

3. If your not really quite sure what do, it may make sense to just but 50% in cash and 50% in a diversified portfolio. This way you down minimize risk but still capture some of the upside if things turn out better than expected.

4. If you were smart enough, had enough balls, or just didn’t know any better and put money into the market at its low point, well this might be a good time to take those profits off the table. There is an old saying that “profit is not a four letter word”. 

5. Instead of investing in the market for a bit, invest in yourself.  Find new ways to grow your knowledge and maybe even your income. There is a whole new economy unfolding, that no matter what the market does, will make how we do business radically different in the coming years. Find ways to be prepared for it and profit from it.

Again, I am writing this as a precaution.  I don’t want to be right. In fact, I’d love to have the days back when everyone was making 10%-20% in their retirement plans and investments, etc. Just be careful and I encourage you to think smart and think for yourselves.

Tony Robbin’s Video on Economy

CNN Video Worth Watching  (FYI this one is a little more nerdy)

I would love to hear your thoughts… even if you think all this is being a bit nuts or paranoid.

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