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At the present time there appears to be a lot of confusion and dare I say it, panic, amongst private investors in the market place. Investors are scared that the stock market is over-valued and that it is due either for a correction or a major crash and yet seem absolutely helpless to do anything about it.
This baffles me because if you know something is about to happen to you which is going to be painful then surely it would make sense to do something to counter it.
It’s the equivalent of a deer being caught in the headlights of an oncoming truck and not moving out of the way. The only difference is that the deer has far more reason not to take preventative action, than an investor does.
Firstly, the poor deer has no real idea about what is about to happen to her and secondly, even if she did and depending on the speed of the truck she probably doesn’t have a huge opportunity to get away in any case. The same can’t be said for investors.
We have all lived through stock market crashes before and so we all know exactly what is coming and what to expect. Furthermore, and unlike our friend Bambi we don’t have a split second to make a life-changing decision. Quite frankly, we should be embarrassed with ourselves with how much time that we actually have. We don’t have seconds, minutes, hours or even days. We have months to plan ahead, years even. And that’s the crazy thing.
A stock market that turns from bullish to bearish is like a great big oil tanker trying to slowly make a 180-degree turn in the middle of a tiny bay whilst honking its horn warning everybody of its presence. The bloody thing takes ages to turn around and will undoubtedly crash several times as it tries to manoeuvre its way out. The point is that everybody can see what’s happening and we all have time to move out of the way.
And yet most people don’t. So why is that?
Why people don’t move out of the way
There are two reasons why people don’t want to move out of the way.
The first reason is because we have been conditioned, even brain-washed, by the big hedge funds not to panic and to instead play ‘the long game’. The motivation for hedge funds to act in this misleading way is clear; they don’t want you to panic and cash in your shares, because if you do the value of their funds fall and they don’t make their fees. Even the media has been hood-winked by the professionals into believing that there is no value in trying to predict market direction. What a load of nonsense.
The second reason is because private investors have been denied the basic education and tools that are needed to protect themselves against a market crash. And yes, again the hedge funds are to blame. Think about it like this – if as an investor you are told that there is nothing that you can do about a stock market crash and it is part and parcel of investing, then obviously you are most likely not even going to try to do nothing about it.
The truth is that the tools are already available to not only predict when a market correction is about to happen, but also to protect us from the correction. Indeed, we could even make money from a market crash! Imagine that.
This is not a far-fetched scenario, and contrary to popular belief nor does it involve risky derivative trading type scenarios. Once again this is a fallacy borne out of investor ignorance and relentlessly perpetuated by the very same hedge funds whose job it is to convince you to leave your pension money with them for as long as possible.
So, the question really comes to this – what are the tools, what are the strategies, and what is the information that you need to know in order to protect yourself from the next market crash?
Easy as ABC
Easy – there are 3 simple strategies that could save you tens of thousands of pounds and will put you ahead of 95% of other investors – and it’s incorporated in one simple word, CAP.
- Cash – The easiest thing to do in the world when things go bad is just sell your shares and go into cash. You won’t earn very much interest on the cash but at least you won’t be risking anything. Simple to implement and incredibly effective. The only thing that you need to become good at is when to cash in which I will explain in just a few moments.
- Asset Allocation – if you don’t like the idea of not earning any sort of return on your capital then instead of just selling and keeping cash, you can use that cash to buy bonds. This is known as asset allocation – you are re-allocating your assets and moving from the higher risk asset class of equities to the lower risk asset class of fixed income investments. Again, very simple.
- Protection – the third way is not to sell your equities at all but simply to protect them. This is the most popular method by the hedge funds and investment banks even though they don’t want you to know this strategy for yourself. That’s because it allows them to continue to receive dividends on their shares and if the market surprises everybody actually goes up in value, they also benefit from the capital appreciation. It’s the equivalent of having your cake and eating it.
Now obviously you still need to know how to implement each of the 3 strategies effectively and knowing which tools to use for which job, but in terms of simplicity, I hope that you agree with me that the concepts are pretty straight forward.
Now, let’s move onto the timing.
Many people think that nobody can time that market. That’s not true. The market gives plenty of bearish signals long before the eventual crash so that even the most insensitive of investors cannot say that they didn’t know.
Think back to what happened to the banks including Northern Rock during the 2007/8 crisis. Did we all wake up one day to hear that Northern Rock had gone bust or was the company struggling for several months before that fateful day?
And what about the other companies in your portfolio. Did they all fall by 50% or more in the blink of an eye or was it over a period of time – days, weeks, months?
You see, this is the point. As humans it is in our nature not to want to accept a loss. Sometimes it can be an innate feeling that we always have to be right and on other occasions it’s because we just don’t want to face up to the reality that we could lose more money and so we just put our heads in the sand and hope that it will go away.
Of course, it never does go away. In fact, it just gets worse and worse until at some point, which society now commonly refer to as the point of no-return, we convince ourselves that the best thing is just to wait for the whole thing to recover, which usually takes several years. What a terrible strategy – basically we convince ourselves that we are right even when we know deep down that we are wrong, and we continually feed ourselves this lie for several months or in some cases years, until eventually we get to a point that we finally accept that we were in fact wrong for all of this time, and that we were never right but then who cares because now it’s not too late to change it any case.
Oh, I nearly forgot, and then about ten years later we repeat the whole process again. Genius.
Preparation and timing
Preparation is key and knowing what to look out for. There is a big difference when the stock market falls by 5% or 10% because this can be attributable to profit-taking and is common and actually healthy for all upward moving stock market trends. However, when the stock market fails to recover back to its previous high and then corrects back down again, and then recovers again and then corrects back down again and so on – well this ladies and gentlemen is what we call a ‘neutral’ market.
It’s the equivalent of the oil tanker not moving forward but turning around and around. It’s the same as a tug of war between the bulls and bears – the market is not going up or down and is stuck in a ‘trading range’. And every single stock market crash begins in this way – whether it is in the UK, the USA, Japan or in Guatemala. Every crash is preceded by this movement and it will last at least for many weeks, and typically for several months. That gives you time to get the hell out of there if you want to play it safe.
Eventually there will be a ‘breakout’ and then one of two things will happen.
Either the market will break upwards through the resistance level and we now have a continuation of the previous bull market, or it will break downwards through the support level, at which point we know are now very likely to experience a full-blown stock market crash.
And that’s it. And if you go back in time and look at every stock market crash on any exchange in any country in the world, over the past 100 years, I promise you that so you will see the same pattern emerging. So when the fund managers tell you that you can’t time the market send them a copy of this article and expect to hear stunned silence on the other side of the telephone.
Now, let’s say for a moment that it’s still not clear for you and you can’t see this pattern emerging. Instead you could look at the fundamentals which is seen every day on the news through the state of the economy. The economy and the stock market usually run side by side and so when the economy starts to falter (unemployment increases, inflation goes up, growth is stalling and so on), the stock market will normally follow suit a few months later. So once again it should be easy enough for you to able at least get an idea of whether things are good or bad, right?
But let’s now assume that some investors have somehow missed this as well. As hard as it is to imagine there are some people who have stocks and shares but are oblivious to the stock market movement, and of which some of those also don’t watch the news, don’t read newspapers and have no idea about the state of the world economy – so, how can we help these fellow investor comrades?
Well, good news they are still going to be okay. Yes, we are all going to be okay.
Because all that we have to do is follow the 3rd step in the CAP strategy – protection.
In fact, you could regard it as insurance. In the same way that you can take out insurance on your home or your car, you can take out a type of insurance on your portfolio. It’s not technically insurance but it works in a similar way. For a fixed upfront cost for a period of time you can buy yourself some protection in case the market suddenly falls.
You still get to keep your shares and so you still receive all of the benefits from your dividends and growth, but you just have this added level of insurance if the worst happens. This means that you don’t need to predict the market falling or when it might happen. So, you don’t need to worry about timing the market – you just constantly have insurance whatever happens.
It’s like taking an umbrella out with you every day even though you already know that you are only going to have to use it sometimes. It might be a little inconvenient but at least you don’t need to guess when it’s going to rain.
And that’s the point. If you break investing down into simple steps, it’s not rocket science, it’s not even GCSE Science.
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The CAP investment approach
The same goes for what types of investment strategies work best in the different market conditions. Well it’s the same KISS (Keep It Simple Stupid) principle.
If the market is going up and up, and we are in a bull market, then you should follow a long term, buy and hold investment approach. You should also be aggressive and opt for companies with capital growth potential. Why? Because you are going to make a lot more money from the appreciation in price than you will from dividends.
When the market is bobbing up and down in a sideways fashion and you are not sure about its direction, you should switch over to a more balanced investment portfolio, so a combination of capital growth stocks and income payers.
And when the market is likely to fall or showing signs of weakness that’s when you take the foot off the proverbial gas and become more conservative. This means moving away from capital stocks and switching into very low-risk dividend shares and fixed income bonds.
It’s so easy that I call it the ABC of investing – Aggressive, Balanced or Conservative.
And yet speak to any investment manager and what do they tell you to do – follow one strategy whatever the market conditions which of course coincidentally happens to be the one that favours them the most – a buy and hold approach. That only works well in certain conditions – after a market has crashed and for a few years before the next correction. Then you need to change your approach as the market changes direction.
Making it Fun and simple
As the CEO of London Stone Securities and the London Stone Group, I hope that you understand that my job is not to trivialise the importance of a stock market crash or to make jovial comments that somehow undermines its significance. The reason that I write this in the fashion in which I do is to appeal to investors who do not have the level of investment experience or knowledge and therefore feel that these strategies are beyond them.
There are thousands of cleverly worded reports using highly technical language that will bore and spook you in equal measure. I should know, because I have written my fair share of them. However, they serve no useful purpose in my attempt to bring my message to the masses. I want to break the myth that this is too hard for the average investor and that the fund managers know best and you should continue paying them extortionate fees for providing a service which you could do better yourself at a fraction of the cost.
I have seen with my own eyes the devastating impact that a collapsed share portfolio can have on a family’s finances and how this can impact their children’s education. I know what it means for a retired pensioner to lose their life savings in banking shares because they were ill-advised by their financial advisor that it was a safe investment.
I know only too well having dealt with clients for more than two decades in trying to help them with their investments, that for people of a certain age there are no second chances.
On average it takes between 5 to 7 years for an average share portfolio to recover from a stock market crash. That’s not great news if you are already in your 70s and you were looking forward to nice holidays and a happy retirement.
And that’s why I am writing about this now. Because I do believe that the market is over-valued and I do believe that we are headed for a crash. Nobody has perfect timing, myself included, but the signals are there and the dark clouds are gathering above.
I might be wrong but then even if I am what do you have to lose? If you protect your investments from a crash and the crash doesn’t happen, the downside is pretty limited. It cost you a bit of money and some of your time. But if I am right and the crash does happen, then you will have taken the trajectory of your life onto a different path. That’s pretty important.
Like any investment strategy there are risks but the biggest risk that you currently are faced with is not taking any action at all. Because the market always crashes eventually, sooner or later.
So now is the time to make a decision that can fundamentally change the course of your financials and indeed the quality of your life. Just like that deer, you still have an opportunity to move out of the way. You just need to know how to, but unlike the poor deer, you have somebody to help you.
The first step is to join me at a free webinar that I will be holding very shortly. It is entitled ‘Why everybody needs an umbrella even when it’s not raining’.
For one hour I will show you the exact strategies that I am currently implementing for my clients to protect their investments so you can see that it really is as easy as reciting the ABC. And if after watching the webinar you find that it’s still all too much to bear and you need a helping hand then of course I am here to provide that service too.
Places are limited and so to reserve your place, email firstname.lastname@example.org.
And whatever else you might be thinking about doing, first things first – please, get yourself off that road. I can hear a truck coming.
CEO, Hedging Expert, Investment Manager and Friend to the People