7 Rules for Investing in Tough Markets

August 11th, 2011 | Author: | Finance & Investing
These are the two main articles on Yahoo Finance today after the market has lost almost 20% from the April 2011 highs:  “4 Rules for the Volatile market”, and “With such market volatility should you move into cash?”
 
I’m sure these links receive quite a lot of attention for the search engine/portals. After all, I clicked on the first one. But, the advice given is akin to closing the gate after the horse has left the barn! Your plan for retirement is doomed to failure with this kind of guidance.

I’m always surprised at what gets recommended when the situation has already deteriorated some significant degree. At the same time, I have a great sense of compassion and frustration over the needless pain investors are enduing. In an effort to avoid this pain going forward, here are some useful rules for investing in this market:

1. You should not be in this position in the first place. Your investment advisor should have been asking him or her self what to do in anticipation of what is going on now. A plan should have been in place six months ago preparing for the trouble we have now. And, that plan should be well on its way to being implemented at this point. It’s too late to be asking what to do now! You should never have been left in this position to begin with.

2. You must have a plan that anticipates what happens next. So you must determine if this trouble is a short term issue (a few days or weeks) or something longer. If it is a longer term issue, then stay in cash (you should have been moving to cash the entire first half of this year). If it’s a short term issue, then you need to be making investments now in anticipation of what happens next, not based on what is happening today – today is already over before it ever gets started.

3. You must know which assets are inexpensive and not just cheap. Some companies are cheap because there is serious trouble in the business (think of Countrywide in 2008). Some companies are inexpensive and the business is just fine (think of American Express at the same time). If you buy the troubled cheap asset during the meltdown, you loose almost everything. If you buy the one that’s just inexpensive, you can come out smelling like a rose.

4. You’ve got to know what really fits your situation. You must know how your taxes are increased or reduced by your investment. You must know what could cause the worst case scenario for the investment to become reality. You must know how the investment contributes to your cash flow needs and so on.

5. You must position your portfolio to benefit from the fear that exists. On the flip side, when times are really good, you must prepare to benefit your investments from euphoria. At all times remind yourself of rule number 3 above.

6. Understand, if you sell today you’re rolling the dice, and if you hold, you’re also rolling the dice. In other words, by waiting until the event (the meltdown this time) is in full swing, you are damned if you do, and damned if you don’t. A well crafted, and properly executed, plan would have you avoiding this dilemma which has long lasting potential to ruin your finances without recourse.

7. If you do decide to sell now, DO NOT BUY AN ANNUITY. This will only lock in your losses for an additional 7-10 years (because of surrender charges and investment expenses) and likely eliminate any potential to recover, when the recovery begins.

If you haven’t prepared for this current meltdown, you may be tempted to do nothing or do anything to stop the “pain”. What you must be doing now, is preparing yourself for what happens next and then what happens after that. Use the pain you are experiencing now to motivate and inform your next set of actions: Like get a new investment advisor such as my company, The Barfield Group.



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