Replies

In my totally unqualified opinion, the first thing you need to do is decide on an asset allocation. How much of the money do you want in solidly safe investments, how much in moderate risk, how much are you willing to put in speculative investments. Do you want/need any of the money to generate income? Then make your decisions within each category.

I am not as sanguine about the market as everyone else. I think the next bear market could be more brutal than the last few and as a consequence liquidated a lot of my holdings over the past year and went to six-month to one-year CDs for now. I also like some of the dividend paying ETFs, and bear market ETFs are made for these times.

There are two different tactics you can take. I’ll give you my situation as an example.

My husband should be retiring from the army as an E-9/28 in a few years. We’re expecting a retirement check of about $3000. (We’re estimating low just to be safe.)

In order to keep our current lifestyle, we’d have to invest about $500,000 (assuming a steady 8% return on investments, 4% of the interest earned for inflation, after taxes and fees) for us to keep a steady stream of $2000 a month (going up by 4% a year for inflation) for the rest of our lives.

With the market instability, I’ve moved all of our investments into the G Fund (government bonds, etc) to protect what we already have and we’re stopping there.

Right now I’m investing in hard goods which will make it possible to live off the retirement check. I’m learning how to can food, we’re building pens to house chickens for meat and eggs. We’ve spent $600 to better insulate our roof to cut down on heating and AC costs. (Saved us $160 in August alone.) We’re putting in a large garden. I want to put in a well with a solar powered pump, but we won’t be able to do that for some time.

The funny thing is that we can invest less than $40,000 and not *need* the $2000 a month of dividends from a money market account to get by. We’ll have an extra hour’s work twice a day and several days work during harvest time, but we’ll be safely positioned to weather any storm. If things don’t break down then my husband will have work and I’ll be able to pay cash of that dream house I’ve always wanted! :-)

Just another way of viewing the situation.

Just as one part of the plan, I would recommend RIG and SLB. The offshore drilling ban will end soon and they are already printing money. Even with a downturn in the economy, these will prosper as we will always need more energy.

The way I enter a trade I desire to have stock in, is to sell a put at a lower strike than now. I generate income this way and if the stock is "put" to me, I get it at a better price than when I first thought it was a good buy. As an example, I sold 5 OCT RIG 110 puts for $4.80 last week. I had just allowed 5 SEP RIG 115 puts to expire. If the stock falls to below 110 by OCT, I may average down by selling 5 more puts at a 100 or 105 strike. Remember I wanted to own the shares anyway, so I am just lowering my entry price. I have my own methods for deciding how low the strike might go and use charts and technicals for the entry timing.

I would then sell calls against the shares if they are put to me. I have averaged over 16% return over the last 7 years doing this method. I do have one dud I may have to just take a loss on, however. I used this method for UNH right before it decided to fall 50%. No one can make up that sort of percentage loss in a short period. There have been many companies that have fallen 50% or more this year, so sector selection is vital. I have worked my way out of HOG and a couple of others, but UNH looks dead.

One rule I have always followed my whole life is you can't pay someone to love your children or make you money so I shy away from money managers and mutual funds. If you can't read a chart, buy CD's( or classic cars). I've been investing since Nixon was president and a 500 Dow. Most investors I see now are just guessers and gamblers and don't have the personality to withstand a downturn. Some have never seen a downturn. The people that say this is as bad as the depression obviously weren't alive then or during Carter's years or the Black Monday in Oct '87. I was there during Carter, "87, and 9/11. That's when you make your best money. It can, and most likely will, get alot worse from here. Bubbles don't rise in a day and they don't pop in a day. Always keep some cash for days that scare you. Those are the days you will want to grit your teeth and buy something.

I believe that this will be a unique and severe downturn. Its most striking feature will be a collapse in credit, at the international, national, corporate and personal level. (Just today, the Chinese banking regulator has directed that Chinese banks will no longer make interbank loans to US banks. There is uncertainty that the US can continue to meet its long term t-bill obligations as well.)

For this reason, it is probably not a good idea to invest in anything right now, with the least worrisome being tax free long term municipal bonds. Liquidity is king, and the wiser corporations are building up enormous pools of idle money.

But even liquidity has its risks. The FDIC is asking for an immediate injection of $170B to insure it has the funds to repay bank savings accounts up to $100,000. However, the pressure of the crisis means that the FDIC can no longer guarantee beyond doubt that it will be able to return these funds in a timely manner, when faced with the failure of 50 or more banks.

On top of this, there is a strong potential of a major run on paper currency, in that the Bureau of Engraving and Printing, which is at 100% production, only provides about 5% paper currency to back our virtual currency.

The credit card companies may be forced to discontinue offering credit as well, invalidating cards. In turn, this may also force the banks to discontinue bank checking, facing a deluge of overdrafts, or retailers may decide to refuse bank checks.

This will leave only debit cards and cash for ordinary commerce.

The bottom line recommendations are first, that if you have more than $20,000 in a savings bank, you should withdraw it immediately. It would not be unreasonable to keep between $3,000-$5,000 in cash in a secure location in your home.

Significant assets at a stable brokerage should be accessible through a brokerage issued debit card. Any margin, credit, or leveraged purchases should be completed as soon as possible. Set a bottom limit to stocks as a “stop-loss”, so that you will not be completely wiped out.

A first level market collapse was projected just before the AIG bailout, in which the DOW would have dropped to 8300. The cash infusion limited it to about -500. Structurally speaking, a practical floor for the DOW is now about 3000.

If you have any automatic withdrawl accounts attached to your savings, now would be a good time to review them, as well as safety deposit boxes.

Insurance companies are at risk as well, so policies should be reviewed, especially in your case malpractice insurance.