Fred's Intelligent Bear Site

Financial Survival Recommendations


If we are entering a long term bear market, financial survival will be difficult. Your focus will have to switch from return on capital to return of capital.

I am not an investment advisor, and I have no idea where the market is going next week or next month. However, if you believe we are in the middle of a long term secular bear market, below are some suggestions to help you preserve your wealth.

These are the stages in a typical investment cycle. I believe we are now in Stage 3.
1. Stocks - Low interest rates and economic growth means stocks are the place to be. Stocks eventually reach a level of valuation that cannot be maintained. It requires an ever increasing money supply and debt burden to support stock valuations at the end of this stage.
2. Cash - After the bubble bursts, the bankruptcies kick in, which is deflationary. Cash is king during deflation.
3. Hard assets (gold) - The Government tries to re-inflate. This causes inflation and eventually higher interest rates. Gold is an excellent investment here.
4. Bonds - As interest rates finally peak, long term bonds offer the best return.
5. As interest rates drop, it is time for stocks again.

Stage 2 was never allowed to fully develop. Before there were enough bankruptcies to reduce the debt bubble, Bush offered a massive stimulus through 2 wars, tax cuts, and big government spending. Even though Obama promised change, his strategy has been to massively outspend Bush while making America less competitive in the world market, further eroding our ability to service the debt he has created. There are 2 ways to reduce debt: bankruptcy and inflation. The Government and the Federal Reserve have obviously chosen inflation.

I believe that the key to long term investing is simple. Just concentrate your investments in the sector that is in the bull market phase of the long term cycle. During a long term bear market, the most important thing is preservation of wealth. If you can preserve your wealth through a high weighting of gold in your portfolio, you will be ready to take advantage of the value that long term bonds will offer when interest rates finally peak.

Here are my recommendations in order of risk:

1. Cash - The Vanguard money market fund pays a very low rate. Unfortunately, this is not enough return to keep up with the declining Dollar. One possibility to hedge against the Dollar is a foreign currency ETF such as UDN.

2. Short term high quality bonds, TIPS (Treasury Inflation Protected Securities), and CDs - The Vanguard short term bond fund has a yield barely above the money market, and there is some risk if interest rates increase. However, the short term maturity will minimize the impact of any interest rate increases if your holding period is more than 2 years. TIPS offer protection against inflation and slightly better yield than money markets. An insured EverBank CD also offers a yield better than the money market.

3. High dividend, recession resistant stocks - There are some utility and energy stocks out there that pay excellent dividends. Unfortunately, these dividends sometimes come with significant risk because many of these companies are loaded with debt.

4. International bonds - International bond funds can yield more than U.S. bond funds and offer some protection from a falling Dollar. The dangers are rising interest rates and a debt crisis. Some ETFs worth considering are ESD, LBF, AWF, and EMD.

5. Gold (physical & stocks) - Physical gold is a conservative hedge against inflation and a declining Dollar. It is now possible to buy physical gold in an ETF just like a stock. The symbol is GLD. Gold stocks are much more risky than gold bullion because the cost of mining tends to go up with inflation. This can make profits elusive even as the price of gold rises. If you are interested in gold stocks, be aware that individual gold stocks are extremely volatile. A better choice for most people might be the gold stock ETF, GDX.

6. International stocks - There will be successful economies somewhere in the world during these difficult times, but I have no idea where they will be. If you identify a country with favorable growth prospects, investing in it will have the added advantage of acting as a hedge against the Dollar. I would not look in the usual places such as Japan and Europe. A good ETF for Asia without Japan is AXJL.

7. Short market - The danger in long term shorting is that inflation can make the short lose money even though the inflation adjusted value of stocks is declining. If you must short the market, the best way is to directly short an ETF of a major index (SPY, DIA, QQQQ). I cannot recommend any inverse funds or ETFs for long term shorting because they have too much slippage in relation to the index they are supposed to inversely track. Even the Rydex Ursa fund (RYURX) has shown significant slippage over the last few years. I recommend all but the most nimble market timers stay away from options or funds that use options for leverage. The time erosion, volatility premium, spreads, and commissions all work against you when you buy options.
Rydex Ursa and Bear ProFund compared to S&P 500

If you follow these recommendations, you should be in a good position to invest in the new bull market in bonds and then stocks that may begin around 2020.


Disclaimer: Fred's Intelligent Bear Site provides this information for your interest; however, you are ultimately responsible for decisions on where to put or move your money. This site is not liable for any decisions you make. This site is presented "as is" and may contain inaccurate information. This site is not maintained by an investment professional.


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