Investing: In the New Economy
If you have been worried about the stock market lately, you probably don’t have the right investing strategy. Despite all the recent volatility, I have been sleeping well and not worried at all. Why is that you might ask? Well simply put, I switched to a very different investing strategy after the Great Recession, almost 10 years ago.
I believe we are living in a time of major bubbles, followed by huge crashes that are amplified by leverage in the financial system including central bank “easy money” policy, which encourages speculative borrowing. Here are a few examples of recent bear markets and the loss of the S&P 500 stock index:
October 2007 – March 2009 (Great Recession) – 56.4% loss
March 2000 – October 2002 (Dot.com) – 49.1% loss
August 1987 – December 1987 (Black Monday) – 33.5% loss
It’s interesting to note that the last three bear markets have seen losses grow each time. Traditional investment approaches, especially for small investors, just don’t work anymore. Buying stocks and holding on to them long term exposes you to huge losses in market downturns that are very difficult to recover from. I’ll give you an example. Say you invest in stocks and your portfolio loses half its value, so it goes from $50,000 to $25,000. How long will it take you to just to get back to $50,000? Well, it depends on your rate of return, but here are a few examples:
5% - 14 years
7% - 10 years
10% - 7 years
12% - 6 years
As you can see, a 50% loss is catastrophic to a portfolio and just getting back to where you started is extremely difficult.
While I don’t see tremendous returns, I do get slow and steady returns and most importantly little or no volatility in the value of my portfolio. Here’s what I do to enjoy solid returns with low volatility:
First of all, I made my 401(k) portfolio very conservative and I only have 20% exposed to stocks, broadly diversified with the rest in a relatively equal mix of bonds, fixed income and cash. My year to date return is only -3%, which feels pretty good given what has happened to the stock market recently. What’s even better, is that when the market recovers and as I continue to make contributions every month, the equity portion of my portfolio will enjoy out-sized gains and will help boost my overall return.
Secondly, I use a number of different passive income strategies to generate cash flow with little or no volatility, including:
Cash invested in US Treasury bills, which have a very nice interest rate currently (much higher than banks) – close to 2% as of this writing
I also have a few investments that could enjoy tremendous (10x or more) returns, but are highly risky and therefore I have only allocated a small amount to them:
Early stage company ("Angel") investments
I also keep a small amount of my portfolio in gold and silver coins for safety, inflation hedge and long term appreciation.
This is the essence of Building a Financial Fortress, which I have been practicing for the last 10 years and I believe it’s very important to find new, creative ways to protect and grow your wealth in the new economic environment we are facing today.
For more investing ideas, click here.