Making Money Alert
Complacency Is Your Biggest Threat
03/07/2007
The huge market declines we've seen over the past week have caused investors a lot of sleepless nights. And, much of the selling in stocks we've seen over the past eight days has even bordered on panic. There is no doubt that in just a little over a week, the dynamics of this bull market have indeed been significantly altered, and in my opinion, we have not yet seen the end of this current wave of selling.
This sea change in the market's complexion has taken us from what was up to this time indiscriminate accumulation in stocks, i.e., undue risk taking, to what now can be called a staunch bias toward distribution, i.e., risk aversion.
For the past eight months, the more risk you've subjected your assets to, then the greater your return has been. If you bought emerging markets, you made more money than if you bought the broader international market. If you bought small-cap stocks you made more than if you just purchased the S&P 500. So, it should come as no surprise that risk really hasn't been much to worry about here -- that is, until last week's meltdown.
What I want all of my readers to understand is that you simply cannot be complacent about this market decline. It is definitely for real. And, one look at the accompanying charts here should provide you unambiguous proof of the damage we've seen in the Dow, financial stocks and international stocks -- three of the leading sectors in this bull market. All three of these sectors are significantly off their highs, plunging below their 50-day moving averages and heading straight for their longer-term, 200-day moving averages.
Not being complacent about this market goes beyond watching CNBC, reading the Wall Street Journal or even reading the Alert. You actually have to take steps to protect yourself if you want to avoid falling victim to pacifism when it comes to managing your portfolio.
At the very least, you already should have raised some cash in your portfolio. There is no logical reason why you now should be 100% invested in equities, with the market as volatile as it has been. Whether it's a 20%, 30%, 50% or even 100% cash allocation, a prudent investor should have some cash cushion in his or her portfolio.
Now when I talk about cash, I also am talking about bonds. In my High Monthly Income service, we have a 65% allocation to fixed income assets. That overweighting in bonds has helped us to weather this current drop in equities quite nicely.
Even traditional safe havens like gold and energy stocks have fallen victim to the current selling spree. And, it seems like the only refuge for investors here has been cash and bonds.
If you want to find out more about how the High Monthly Income service protected subscriber's retirement assets from what happened in equities last week, then I invite you to check out this service now.
Remember that doing nothing in the face of adversity is never the solution to a problem. In market terms, this means avoiding one of the biggest threats to your money: the natural tendency to be complacent when things get tough.
DID ETFs CAUSE THE SELL-OFF?
I have read and heard multiple commentaries this past week on how the proliferation of ETFs contributed greatly to the grandeur of the current market decline. That's like saying the invention of the light bulb contributes greatly to the adverse affects of a blackout.
Whenever you get a big sell-off in the market, you seem to get people out there blaming the tools for the decline rather than the intentions of those who use the tools. To give you another apt analogy here, it's like blaming the gun for killing someone rather than the person who squeezed the trigger.
Now I will acknowledge that ETFs have contributed to the overall increase in the volume of shares traded, and they do contribute somewhat to the increased volatility in the market -- both on the downside, as well as the upside. But the increased trading volume we've seen in this market has more to do with hedge funds ratcheting down the level of risk in their portfolios. Sure, they are using ETFs to do this, but that doesn't mean that ETFs are causing their sentiment. The sentiment exists and ETFs are merely the tools by which investors are choosing to implement that sentiment.
If anything, this past week is a great example of the virtues of ETFs. If hedge funds find them the most convenient way to move big money in and out of the market, shouldn't it be obvious that ETFs are indeed very efficient tools to accomplish this task?
On my radio show, I've been telling listeners that depending on the conditions in a given market environment, there are certain tools you want to have at the ready that will help you to take advantage of those conditions.
At this time, I want all of my Alert readers to become familiar with bear market funds. These are mutual funds and ETFs designed to go up when the market indices are going down. It's like betting on the Don't Pass line at the craps table. In these funds, you make money on the short side, while long investors are losing their shirts.
To help you all become familiar with bear market funds, I have included a link to our complete Bear Market Report. This PDF file lists all 67 bear market funds (40 mutual funds and 27 ETFs), along with their recent performance data. This report provides a portrait of the entire bear market fund landscape. You'll see that there are many varieties of bear market funds, including sector and leveraged bear market funds.
To get your very own copy of the Bear Market Report, just click here.
YOUR RETIREMENT ROADMAP
Last week's seminar on achieving your retirement dreams was a huge success and I'd like to thank all of you who came out for this event. I know by your positive feedback and enthusiastic comments that you came away with a great deal of knowledge on how to get your retirement ship righted.
This seminar was so successful that I decided to provide the audio commentary and the 41-page seminar handout free of charge to Alert readers at DougFabian.com. The audio commentary has been broken up into three, one-hour segments. The handout is in PDF format and should be used to follow along with the audio commentary.
One of the key objectives of this seminar is to teach you how to establish your own Retirement Roadmap. Here you will learn about the following key areas of concern when crafting your very own roadmap:
- Setting goals and objectives
- Quantifying your assets and liabilities
- Projecting the value of your retirement accounts
- Assessing future assets as they relate to your retirement goals
- Making adjustment and taking action
To get free access to the full contents of this seminar, just point your browsers here.
I guarantee three things about this seminar: You'll learn a great deal, you'll be entertained, and it will be time well spent.
Hey, what more can you ask for?
NEW SPECIAL REPORT AVAILABLE NOW!
Worried about managing risk in this uncertain political and economic climate? If you aren't worried, you should be. The risks we all face right now require sound financial stewardship. These days, you just have to know how to protect yourself.
That's why I want you all to go here for your FREE Special Report titled, "The Successful Investor's Guide To Managing Risk."
WISDOM FROM A SKEPTIC
"The danger to society is not merely that it should believe wrong things, though that is great enough; but that it should become credulous, and lose the habit of testing things and inquiring into them, for then it must sink back into savagery… It may matter little to me, in my cloud-castle of sweet illusions and darling lies; but it matters much to Man that I have made my neighbors ready to deceive. The credulous man is father to the liar and the cheat."
—W.K. Clifford, Lectures and Essays Vol. II
Skepticism of the kind we see in Clifford's quote is a tremendous virtue, particularly when it comes to something as critical as your money. When investing, don't be suckered into a "cloud-castle of sweet illusions and darling lies." Eschew the idea that markets are always safe and everything will be all right if you just uncritically throw your money at stocks. Investing involves risk. The more skeptical you are before you subject your dollars to that risk, the more successful you'll likely be in sidestepping the dangers accompanying that risk.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.