I completely agree. The conventional wisdom of buy and hold a diversified portfolio of stocks and bonds or index funds is simply bad advise right now.
While stocks do tend to out-perform over the "long-term" there have been multiple 10 year periods when stocks lost big in terms of real inflation adjusted returns. (e.g. 1929-1960, 1971-1983, 2000-present)
As a primer on the current financial crisis, I recommend firing up your favorite search engine and reading up on:
* inflation: understand that inflation is not rising prices, it is inflation of the money supply and debasement of the currency
* fraction-reserve banking and fiat currency (understand the leverage built into banks and financials and its impact on the broader economy)
* petrodollars and their importance to the US economy's ability to run deficits and import it's inflation as well as the rise of the Euro and the opening of Iran's oil bourse with it's promise to trade oil in all the world's currencies.
Other posts have listed some great resources, here are some general tips from personal experience:
* Stick to the classics and understand fundamental valuation
* Remember, there is something to technical analysis for short-term trading and market timing, but most of it can be explained by thinking about the supply/demand situation for a specific stock or asset class. Don't get sucked into the voodoo.
* learn to think about stocks and asset classes in marketing terms (branding, awareness, interest, trends, etc.) and you will gain a big edge over most. If you can figure out where the money is flowing and why within market segments or individual stocks, you stand to outperform.
* invest in what you know. find companies you are interested in and learn their investment story. Read their ipo prospectus if it is a new issue or their last 2 annual reports if they are established.
* never accept a stock tip without an explanation of the investment thesis behind the stock. Do your own research and be able to explain why you hold specific positions.
I am an entrepreneur and as such am generally an optimist. However make no mistake, there are clear and significant downside risks to this economy. There is more downside risk than upside potential over the next 6-12 months and possibly longer. The next 12 months will be an education in itself.
I agree that the next 12 months will be an education in itself. I wasn't old enough to remember the 91-92 recession so this will be my first. Things don't look good.
But, I'm curious, why would you not recommend investing in stocks/bonds/funds, even if the economy was going down? I mean, where else would you put your money besides 3% savings accounts? Sure, if your investments return 5% and inflation is 7% you are technically losing money, but it's better than the full -7% you would earn if you stayed out of the market.
Maybe I have to read the book, but I'm curious what you have to say.
Don't get me wrong, for a sophisticated investor this is an excellent time to make money in the market. The thing is, I believe that many 'sophisticated investors' who come along for the ride in a bull market are unprepared for bear markets.
In bear markets the bias is down, up, and sideways at times - but mostly down. Most investors do not participate on the downside and so are biased against the trend.
There are exceptions though and there are more options available to individual investors than ever before. One simple way to play both sides of the market is synthetic ETF index funds such as those available through ProShares and others. (no formal affiliation, but I do have ProShares funds in my portfolio)
With that disclaimer, here's a link: http://www.proshares.com/funds
These funds let you participate in either the short or long side of specific market indices, market sectors, or geographic regions. In some cases they even offer 2:1 leverage allowing you to say, gain 2% for every 1% drop in the DOW. This sort of investment timing generally is not recommended for an average investor. It is very risky stuff.
For the average investor, my advice is to buy gold (gld,xau), silver (slv,slw), and other scarce commodities. Over the past 5 years alone, the US dollar has already lost 65% of it's purchasing power as measured in gold (http://www.kitco.com/LFgif/au1825nyb.gif)
commodity index, alternative energy index. stick to indexes, just not mutual fund or stock indexes.
commodities go up when the stock market goes down and vice-versa. if the recession gets worse, commodities will soar. wait until stock prices are bottoming out (timing is luck) and then switcharoo, get out of commodities and into stocks. this is what the smart money did in the 70's and 80's and this time around it is our turn.
The statement that stocks out-perform over the long run indicates that now is exactly the right time to be starting your index fund investment. What better way to ensure gains than to be buying when stocks are low. Even if they continue to go down over the next few years as you continue to invest, if you believe they are a good long-term bet then you will be far head 40 years from now exactly because you invested in stocks.
This may be true. Or it may not be true - there's always a crisis looming, and often when things look bad, the market has already factored that in. Personally, I'd rather stay invested in index funds through good and bad rather than trying to dodge the crises and hit the booms.
That said, I'm doing a few things to try to hedge against inflation, energy costs, and the US deficit. These are long-term plays, and I'll stay in them for 10+ years.
-- invest globally, not just in the US stock market
-- invest a small amount in an energy index fund (Vanguard Energy ETF) to hedge against energy price increases
-- invest in inflation-protected bonds (TIPS/I-Bonds)
While stocks do tend to out-perform over the "long-term" there have been multiple 10 year periods when stocks lost big in terms of real inflation adjusted returns. (e.g. 1929-1960, 1971-1983, 2000-present)
As a primer on the current financial crisis, I recommend firing up your favorite search engine and reading up on:
* inflation: understand that inflation is not rising prices, it is inflation of the money supply and debasement of the currency
* fraction-reserve banking and fiat currency (understand the leverage built into banks and financials and its impact on the broader economy)
* petrodollars and their importance to the US economy's ability to run deficits and import it's inflation as well as the rise of the Euro and the opening of Iran's oil bourse with it's promise to trade oil in all the world's currencies.
Other posts have listed some great resources, here are some general tips from personal experience:
* Stick to the classics and understand fundamental valuation
* Remember, there is something to technical analysis for short-term trading and market timing, but most of it can be explained by thinking about the supply/demand situation for a specific stock or asset class. Don't get sucked into the voodoo.
* learn to think about stocks and asset classes in marketing terms (branding, awareness, interest, trends, etc.) and you will gain a big edge over most. If you can figure out where the money is flowing and why within market segments or individual stocks, you stand to outperform.
* invest in what you know. find companies you are interested in and learn their investment story. Read their ipo prospectus if it is a new issue or their last 2 annual reports if they are established.
* never accept a stock tip without an explanation of the investment thesis behind the stock. Do your own research and be able to explain why you hold specific positions.
I am an entrepreneur and as such am generally an optimist. However make no mistake, there are clear and significant downside risks to this economy. There is more downside risk than upside potential over the next 6-12 months and possibly longer. The next 12 months will be an education in itself.