Divorced parents, more than anyone, can feel extremely vulnerable during disasters, especially if you are counting on investments to help you shore up the financial hardship that always comes when you have to support two households instead of just one. The last thing you need when a crisis occurs is to feel like the whole world is crashing in, including your emergency funds. Fortunately, with a little forethought and preparedness, you can have confidence that your assets are covered, even in uncertain times.
There are three critical aspects to protecting your assets for any emergency -- preparing before disaster strikes, surviving the catastrophe and recovering. Below are seven important ways to protect your nest egg at all times and to be in the best position to profit (while others are still scrambling to recover). As one of the few people who tripled my stock investments in 2001 -- without shorting -- during a time when most investors lost more than half of their nest egg, I feel a bit qualified to talk about protecting your assets against war and terrorism. And as a single mom, I can tell you that using these strategies helped me to focus my energy on my family during that emotional time for our nation, rather than worrying about the stock market -- an invaluable benefit.
Preparing Yourself Before Disaster Strikes
This tip is one of the most important. If you don't have enough safe, you're giving up your chance to buy low and throwing your entire lot into the whims of a volatile market and a disaster-prone world. During the Great Recession, most people lost half (or more) of their assets, and had to wait three years to recover, while those who had enough safe limited their losses to a fraction of what their friends lost. That safe money also allowed them to buy some of their favorite companies at the lowest prices available in years. NASDAQ scored 40% gains in 2009! Latin America and Australia stocks doubled in 2009-2010! Some people were profiting, while others were merely recovering from losses. Always keep a percentage equal to your age safe, i.e. not invested in stocks.
If you're going to spend all that money on insurance, be sure that you know what is and is not covered. Hurricane Katrina survivors were devastated to learn that their hurricane insurance didn't include the flooding that occurred when the levies failed. You need to know specific details on what is and is not covered before tragedy strikes. I know that more work is the last thing a single parent needs, but this must be done.
Some areas of the market do better than others during tough times. As just one example, during the March 2011 nuclear crisis in Japan, the stock market became a rollercoaster, but most clean energy stocks remained very buoyant. People become far more interested in clean energy when there is a problem with oil (high prices or an oil spill) or nuclear (like the potential meltdown). Gold and oil prices were steady and strong as well. By having your funds diversified into small, medium and large, value and growth and four hot industries, you make sure all of your eggs are not in the same basket when disaster comes to town. And you are also fueling the solutions for a better world for your kids with your investment dollars -- a win-win-win.
Whether it is the anthrax vaccine or investing in potassium iodide, there is always some hot tip raging on the investor chat rooms during disasters. In general, you're better off avoiding all of the sure shots that your favorite "friends" tout. If you do think something sounds interesting, don't buy in without doing a Stock Report Card and asking the Four Questions that are outlined in You Vs. Wall Street. Then, if you're still convinced that you've found a winning company, make sure you're buying it at a good price.
During severe corrections, like we saw on 9/11, your favorite companies can go on sale. However, if you are paralyzed by fear and shock, you'll miss the buying opportunity. It pays to have a Stock Shopping List planned for such occasions -- a list of companies that you've pre-screened and are sure you would love to own, at a lower price. Those who bought on 9.14.01 (when the markets reopened after 9.11) earned 20-30 percent gains in just four months--by January 2002. The Dow and S&P 500 were up 20 percent, while NASDAQ posted 30% gains -- creating a great Christmas/Hanukkah holiday for the kids. Likewise, BP was up 30% in a few short months after the Gulf Oil Spill of 2010 was capped.
The Dow Jones Industrial Average is flat compared to its value ten years ago. NASDAQ is still worth half of its March 2010 high. Annual rebalancing is the only way investors are making any money. Investors that buy and hold in today's slow growth economy, and expect an annual return of 10%, are delusional, whereas those who employ Modern Portfolio Theory with annual rebalancing are doing great. For superior performance, keep a percentage equal to your age safe, avoid the bailouts, add in hot industries, diversify by size and style and rebalance your nest egg 1-4 times a year. Your kids will learn this investing strategy, and so should you.
For individual stocks, where you take on higher risk and hope for a higher return, the temptation might be to set a stop loss. Or, if you bought right before a disaster, the temptation might be to sell quickly to avoid further losses. Both are losing propositions in a volatile world. Instead, think of stop gains. Your window of opportunity for selling for a profit might occur too quickly for you to catch it, so consider having a limit sell order in place at a reasonable profit. In this way, instead of selling low, you are selling high. I was in this position on 9.14, and rather than selling for a loss in September, I waited just three short months and almost tripled my investment. If your ex gets burned in the disaster, it might be up to you to keep the family afloat through the winter holiday. Get additional information in chapter 16 of You Vs. Wall Street, entitled "War, Terrorism and Other Acts of God."
Natalie's Three Takeaway Tips
1. Disasters in the stock market are opportunities to buy into companies that you've loved for a while, but thought were out of your price range. So keep that shopping list of favorite stocks handy.
2. There's a big difference between buying into your favorite companies--that you prescreen before disaster strikes--and being seduced by the promise of hot tips, like anthrax vaccines.
3. The average return for the stock market over the last thirty years was 11 percent. That time period includes many financial disasters, including 9/11, the Asian financial crisis of 1997, the U.S. debt crisis of 1992 and Black Monday 1987 and the Great Recession, when the Dow Jones Industrial Average dropped to a low of 6547.
About Natalie Pace:
Natalie Pace is the author of You Vs. Wall Street. She is a repeat guest on Fox News, CNBC, ABC-TV and a contributor to HuffingtonPost.com, Forbes.com, Sohu.com and BestEverYou.com. As a philanthropist, she has helped to raise more than two million for Los Angeles public schools and financial literacy. Follow her on http://www.facebook.com/NWPace, and on YouTube.com/NataliePaceDOTCOM. For more information please visit, http://www.nataliepace.com.
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