This is an excellent model for today’s investor. If this week’s plunge indeed accelerates into a bear market, simply surviving the carnage with a substantial percentage of your capital intact will constitute “winning”.
So, if you still have long positions in your personal or retirement portfolios, what should you be doing at this point?
1) Move To Cash
Get your money to the sidelines. Remember that everything is relative during periods of extreme volatility like now. When everything around you is dropping in value, the relative value of your cash position rises.
Those who had already moved to cash now find they can buy 7% more of the S&P with it than they could a mere week ago. That relative rise in purchasing power will only increase should the markets fall farther from here.
Cash is also offering an improving absolute return as well these days, as interest rates rise. Not that you’d know it from what your bank is offering you (surprising no one, banks have kept depositor rates near 0% despite receiving higher interest payments themselves from the Federal Reserve).
But holding your cash in short-term T-Bills (durations of less than 1 year) through a program like TreasuryDirect is now returning yields of close to 1.5%. That’s 25-50 times(!) more than what the average bank savings account interest rate is right now.
Given this high relative payout and the extreme safety of Treasurys (the last financial instrument in the world likely to default, as the US will simply print the money to repay, if necessary), this strategy is a clear no-brainer for those with a material amount of cash.
Those looking to learn more about the TreasuryDirect program, including how to open an account there, can read this primer we created.
2) Prepare Your Action Plan
We have long been loud advocates of working with a professional financial advisor. Now, more than ever, you want to review your action plan with him/her.
If you have remaining long positions, battle test them. How do you expect them to perform in a bear market? If the market falls another 10% from here, what will be the expected impact to your overall portfolio? What if the market falls 25%?
Does hedging make sense as a risk management strategy for you? How about building up a short position with a minority percentage of your portfolio?
Now is the time to address and answer these questions, because if indeed a major correction is nigh, it very well may happen so fast you don’t have time to act. (Just ask those holding Bitcoin in January how quickly 50% of your position can vaporize.)
As always, if you’re having difficulty finding a firm willing or able to engage in the above with you, consider scheduling a free consultation with Peak Prosperity’s endorsed financial advisor.
Also, folks frequently underestimate the effort and time it takes to set up accounts, get funds transferred, etc. Don’t set yourself up for the frustration and disappointment of delays should you wait until the midst of a market melt-down to get all this in place. The market may be moving so fast at that point as to make your efforts moot. (Again, talk to the crypto crowd here about their challenges funding accounts and trading through the exchanges last month.)
Instead, get everything set up and prepared now. You don’t need to necessarily transfer any funds at this point. But do yourself the service of getting all the administrative hurdles behind you today.
3) Track The Risks & Opportunities Closely
As we’ve warned for years, we’ve been living through The Mother Of All Financial Bubbles. When it bursts, the damage is going to be truly horrific.
The ride down in the markets is going to be painful and scary. There are going to be many knock-on effects that are impossible to forecast with precision — or even to identify — right now. What will happen with housing, jobs, pensions, entitlement programs, social services, the banking system? All could be impacted.
To what degree? We don’t know at this point. Which is why tracking developments in real-time and assessing their likely impacts will be critical.
Similarly, in crisis there is opportunity. There will be speculative opportunities that present themselves during a melt-down (e.g., shorting mortgage insurers during the 2008 crash). And once markets find their bottom and stabilize, there will be the chance to invest in quality assets at fire-sale values compared to today’s prices.
Knowing when to deploy your dry powder, and what to deploy it into, will be key.
We’ll be doing our best here at PeakProsperity.com every week to offer essential insights to help you stay well-informed and on top of these fast-moving events.
To that mission, we’ve swiftly assembled a webinar on this coming Tuesday, February 13, 2018 at 8pm EST with Chris Martenson, Axel Merk and several other financial experts to provide in-depth context into the recent market plunge, as well as their best assessment of what to expect from here in the near term. (To learn more about the webinar, click here)
Markets are warning us that even stormier seas lie ahead. Heed that warning, sailor, and hold fast!