So for the bulls turning into bears – what should you do?
1: Do not sit around. When markets turn sour then people tend to switch off, as it is not nearly as much fun watchng your net worth go down each day as it was to watch it go up. Act now and you can prevent further loses and maybe make a bit instead.
2: Don’t trust beholden advisers. You may be in denial about the value of your property, or not know where to invest the money you made selling your five rental units last week. Do not ask your real estate agent for help – they have only one eye open. For sure don’t ask your bank manager for advice – investment advisors at banks were eviscerated today by the SST.
3: Diversify. Diversify your assets across different asset classes (stocks, bonds, shares) and countries. Lighten up on real estate – sell out of everything that you don’t live in or earn mortgage beating rent. Cash is an asset too – there is no harm in holding cash in times like this, but don’t stick it all in one instituton.
4: Lower your leverage. Borrowing to invest (in housing or shares say) is great in a rising market, but it is sure as anything a mugs game when the markets are going down. If you are smart then a fortune is to be made. If you are smart and lucky that is. Smart (or dumb) and unlucky will see you on beggars row.
5: Lead the “flight to quality”. In times of big change investors tend to get out of anything remotely unreliable and move their money to quality products. In the 80’s it was the so-called “blue chip” stocks. Buy companies that will keep making money no matter what happens. Beer, soda & newspapers are all good steady income earners.
6: Get out of “rest of the world stocks” US investors will tend to withdraw suddenly from foreign investments when the going gets tough, so do not be surprised if some markets to fail catastrophically.
7: Go back to old fashioned ratios: Look for long term ratios, such as Price/Earnings, Rent/Buy and industry rules of thumb. You’ll find that many of these are off the charts right now, and so get out of those asset classes.
8: Be a vulture. Cash up now, wait until the prices of assets have dropped low enough, then start investing. Look for those ratios to be at historical lows before you do. Third Avenue Investments does this well.
9: Go short – and be a plunger: Shorting stocks is betting that they will go down. If you belief that the glass is half empty (and increasingly people are) then pick a few frothy stocks and sell them short. If you are unsure what direction the market is going, then make sure you have a mix of long and short stocks.
When the market moves, it can move far faster and further than you feel is normal. Don’t be afraid to short and keep shorting, and don’t buy back those shares until you are sure the market really has hit the bottom
10: Earn more than you spend: You can no longer guarantee that you will make money from your real estate or other investments. Tighten up on yur lifestyle, and sell out of anything that is costingyou too much money. Now is not the time to be rash.
If the going gets tough, then you can always get out. Cash up and go – times of turmoil (and depression) are a great time to see the world. I used the post 9/11 period to travel cheaply in the Americas.