Grow Up To 1,000% Richer In The Great Stock Panic Of 2002
Urgent: Get To Safety Immediately!We are back to the present and it's time to prepare for the Great Stock Panic. There is much to do, and not much time to do it. First and foremost is to move to safe harbors. Start by making a complete list of all your assets and clean house by selling off all your investments that are vulnerable to sharp declines in value. Here are the steps I recommend:
Step 1. Sell off most or all of your common stocks and mutual funds: Over half of American families are loaded up on stocks, either directly in a brokerage account or through their mutual funds, more than twice the level of previous eras. Yet, virtually none have experience with large market declines. So they have no clue how a bear market in stocks can devastate their net worth.
If you have read this far, you're different. You have a vision of what the future could bring, and even though you probably will not get all-time peak prices, you can still save yourself a lot of money and headache if you liquidate your stocks now, before the real panic begins.
The safest and easiest way to profit from the panic is simply to sell all or most of your stocks now, put the proceeds in Treasury bills or equivalent, and sit it out.
You profit in two ways: First, your cash will be earning good, steady interest. But even more importantly, the value of your cash, in terms of the number of shares it can buy, will be going up dramatically.
For example, let's say you own 100 shares of the ABC stock at $100 per share and you sell it now for $10,000. And let's say it falls to $50 per share. If you measure your wealth in terms of dollars, very little has changed. You still have $10,000 in your account, plus some interest. But if you measure your wealth in terms of ABC shares, your portfolio is now worth 200 shares. And if the stock market as a whole has fallen 50%, you've effectively doubled your wealth � just by sitting in cash.
A stock that has suffered a fall of 50% from, say $100 to $50 per share, can easily suffer another fall of 50%, to $25 per share, and still another 50% fall, to $12.50 per share. So you should not let that stop you from selling.
As to the timing, however, it is usually not a good idea to liquidate all your shares immediately after a major decline.
My advice: Each situation is different. But if your stock is now in the midst of � or has just completed � a nosedive, it's usually best to: (1) Sell half now to reduce your exposure, and (2) hold the balance to sell on the next good rebound. What's a "good rebound"? When the share price recoups from 20% to 50% of its most recent decline.
Step 2. Protect your 401(k) or similar retirement plan: In a money panic, the 401(k) funds of over 40 million Americans are at serious risk. Two basic principles to adhere to:
1. Don't pull the money out of your 401(k). Even if the investment options in your 401k plan are limited, most do offer alternatives that are a lot safer than the stock market.
2. Within your 401(k) or similar retirement plan, favor safety above yield � choose the safest option available to you. If your plan offers you the option of a Treasury-only money fund, that's ideal. If not, any money market fund is acceptable at this time. And if no money funds are available, a bond fund is almost always safer than stock funds.
For a Risk Rating of the fund choices available to you, see our report, Weiss Risk Ratings for Your Stocks & Mutual Funds. Or visit www.weissratings.com. (Note: There is a nominal charge per rating on this site.)
What if your 401k plan doesn't offer any safe alternatives? My advice: Petition your employers. Let them know that you want a plan that offers more options. You can go to your employer and politely say, "Our 401k plan has only a few options, and they're all invested in the stock market. We need a safer fund in the mix for people who want to be out of stocks entirely." Remind them that under ERISA Section 404(c), retirement plans must offer at least three choices among diversified groups of investments.
If you do not get prompt satisfaction � or until you do � hedge against your retirement funds with the Weiss Windfall Strategy. This is not a conservative strategy, but if your funds are stuck in stocks or a stock mutual fund, this speculative strategy may be able to help protect you against a decline. See our report, the Weiss Windfall Strategy, free for two-year subscribers. Or for a summary, visit our website, www.safemoneyreport.com.
Step 3. Avoid illiquid investments. These include all investments that are hard to find buyers for, as well as those that lock you in with up-front commissions, sales loads, cancellation fees, surrender penalties, early-withdrawal charges, or other fees.
The key to successful investing during a crash, recession, money panic, or any kind of financial turmoil is flexibility � the ability to access your funds immediately, change your mind whenever you want to, and switch to safer or more profitable areas.
For that, your investment must be liquid. It shouldn't take you any time whatsoever to get your money out. Nor should it cost you anything other than a minimal transaction fee.
Here are some illiquid investments to avoid, regardless of their relative safety or performance.
Examples of investments
If you already own an investment that involves heavy exit fees, then you need to weigh carefully the cost of leaving versus the risk of staying.
To help you make that decision, evaluate its risk by using our Weiss Risk Ratings for stocks and mutual funds (www.safemoneyreport.com) and our Weiss Safety Ratings for financial institutions (www.weissratings.com).
Step 4. Liquidate all but the very best corporate bonds: In 1999, 99 US corporations defaulted on $23.5 billion of debt. That's the largest number of defaults and the biggest losses since 1991. Back then, it was expected � the country was in a recession. But in the late 1990s, it was unexpected and raised the question: If this is what's happening in good times, what's going to befall these bonds in bad times? Why are defaults so high? Many companies that have taken on debt are finding that their profits aren't up to expectations, so they can't make the payments.
My advice: Sell all bonds that (a) do not have a Moody's rating of A or better, or (b) are long term. I don't include any corporate bonds in my "Mr. Conservative" portfolio (page 4 of Safe Money Report). But if you insist on keeping some of your favorite corporate bonds, I recommend you hold strictly A, Aa, or Aaa notes and bonds with less than five years in remaining maturity. Before and during a money panic, the shorter the maturity and the higher the rating, the better.
And by all means, get out of junk bonds. Yes, when yields on other conservative investments (like Treasuries) are very low, these higher yielding bonds can be tempting, and brokers love to push them. But watch out. The yield advantages can easily be wiped out by just one default on the banks you own.
The official definition of junk: Any bond with a rating of double-B or lower ("BB" on the S&P; scale; "Ba" on the Moody's scale).
Problem: The rating agencies may often be slow to downgrade companies despite known problems, and they're typically late in recognizing new dangers in the economy.
I repeat: The higher yields of these low-quality bonds are tempting. But they're simply not worth the risk. Indeed, in 2000 defaults on junk bonds were at their highest levels since 1991; and that was taking place in supposedly "good times." What's going to happen as the economy turns down, or worse, when the Money Panic strikes? Hundreds of bond issuers will default on payments. Thousands more could be downgraded to junk bond levels.
Step 5. Steer clear of most convertible bonds, too. On the surface, convertibles may seem attractive. They pay you a fixed rate of interest income. And, at the same time, they give you the option to convert the bonds into company stock at a certain price.
A "can't lose" investment? Not quite. Buying convertible bonds before or during the Money Panic is wrought with risk:
First, if interest rates spike upward in a money panic, they will drive all bond prices lower. Second, stock prices have a long way to go on the downside. So, there's no gain whatsoever to be made if the stock price falls.
And, remember: The option to convert to stocks doesn't come for free. With convertibles, you do pay a hidden price for it � through reduced yields.
Last, in a money panic, hundreds of companies will see their credit ratings slide. That means even more losses for corporate bonds, including convertibles.
Step 6. Reduce your exposure to a real estate bust. As the stock market falls, the "wealth effect" � the paper profits so many Americans have enjoyed for so long during this bull market � vanishes like a dream. In response, consumers are reining in their spending, causing our economy to slow. And that hits real estate prices hard.
First and foremost, dump any Real Estate Investment Trusts (REITs) you may own.
Second, unload unneeded commercial property. As the economy sinks, vacancy rates are bound to jump. Positive cash flows could easily turn negative.
Third, if you've been wanting to move anyway, sell your home. It's usually not wise to sell if it's going to disrupt your life. But if you've been contemplating a change for other reasons anyway, this is the time to do it.
Step 7. Batten down the hatches in your business. You probably know more about your business than anyone. But as a rule, few businesses can claim to be recession-proof and even fewer will avoid the impact of a money panic. Here's what I suggest:
First, speed up your accounts receivable processing; start collecting payments before your customers run out of cash.
Second, check the credit terms that your company offers. You cannot be too generous anymore.
Third, watch your profit margins. Now's a good time to clamp down on unnecessary expenses.
Fourth, and most important, reduce debt and build cash.
Step 8. Reduce your dependence on debt. With every major sector of the US economy leveraged to the hilt and up to its ears in debt, now is the time to make absolutely sure you are as financially liquid and safe as possible. The Great Stock Panic will bring a flood of personal and corporate bankruptcies� and I don't want you to be among the casualties. Here's what to do: