By John Carlucci, author of Ashes to Riches: How to Profit Spectacularly During the Economic Collapse of 2012 to 2022.
In 2008, the financial world was hit by its own version of the meteorite that killed off the dinosaurs. Huge investment banks disappeared into thin air, the stock market went into a terrifying plunge and shell-shocked politicians warned that the world economy was within days of imminent collapse. Millions of ordinary investors saw their world turned upside down as years of planning and saving, years of accumulated wealth were suddenly vaporized.
But catastrophe clears the field for new opportunities and whoever can adapt to the new world thrives. To be a successful investor in our post-meteorite world, you need to embrace several key ideas.
First, realize that much of what you are told by financial "experts" is deliberately incomplete and blatantly self-serving. The truth is, their primary interest is looking out for their income stream, not you. They make money kneading and rolling "Assets Under Management" - your dough. If your account does well, they make money on service fees. And if your account crashes, as in 2008, they'll beg and plead that you stay in the market because they still collect fees servicing the little you have left.
What they don't make money on is you selling all your stocks and going to cash or other safe haven. With that unsettling thought in mind, their conventional "Buy and Hold" strategy has not just become obsolete, but absolutely lethal. That's because in 2000, the market fundamentally transformed from a long term or "secular" bull to a secular bear. The steady upward trend in the market, averaging 18.6% per year from 1982 to 1999, suddenly flat-lined. Since 2000, the S&P has averaged a paltry 0.46% gain per year and there are strong indications we're in for a downward trend that won't be over for at least another decade.
Not surprisingly, most financial "advisers" are still recommending the long term "Buy and Hold" zombie strategy because it guarantees their income as long as you stay invested. But to survive and thrive in a multi-decade-long bear market you must zero in on the short term ups and downs that last for only a few years at most. What are referred to as the "cyclical" bull and bear swings -- within the larger long term secular bear period. Instead of buying and holding for decades on end, you buy at the bottom of a cyclical swing and sell at the top. It's the only strategy with any hope of getting you through this secular bear intact. It isn't good for your broker's income, but you have to put your own interest first -- just like he does.
Likewise, learn how to protect yourself. No sane person would get onto an elevator that didn't have an emergency brake. Likewise, no rational person should invest a dollar without attaching a "stop loss" order to it.
What's a "stop loss"? It's a standing order that protects your investments just like an elevator emergency brake. If your stock price drops to a pre-determined level, either a percentage drop or a dollar amount drop that you choose in advance, the stop loss order automatically executes, selling your stock at the exact price you ordered or as close to it as possible.
Your broker never told you about stop loss orders? You're not alone. From the market peak in 2007 until it hit bottom in March 2009, investors lost approximately $11 trillion in asset value. The entire GDP of the United States in 2008 was $13 trillion. This occurred because very few average investors were protected by stop loss orders. They followed their financial advisers' advice to hold and rode the catastrophe all the way to rock bottom. It was like holding tight to the walls of the elevator as it fell through space.
It's likely to get pretty rough over the next few years but if you keep these few simple ideas in mind at least you won't be as surprised as you would have been, and as millions of others are going to be. In fact, there's even a very good chance you'll thrive in our brave new financial world.
Ashes to Riches: How to Profit Spectacularly during the Economic Collapse of 2012 to 2022, by John F. Carlucci, is published by Endeavour Press Ltd.
The Morning Email helps you start your workday with everything you need to know: breaking news, entertainment and a dash of fun. Learn more