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| Money cash (Photo credit: @Doug88888) |
Chicago, Apr.3, stock trade .- Steve Forbes said it best, "Now any government can seize assets any time they need money."
He was referring to the deal Cyprus had to cut with the EU to prevent the collapse of its banks. The bank tax, as high as 40% on some assets, has set a precedent that, according to Forbes, has added another level of fear to an already fearful world market.
It is time to kick the lemons to lemonade factor into high gear. The press and the leaders in the EU may be downplaying this, but don't kid yourself, this is a game changer.
The heightened uncertainty the Cyprus deal has created in the weaker banking systems in the EU, and worldwide for that matter, should also be creating a new sense of urgency for downside planning in your portfolio. If it isn't, you're whistling past the graveyard.
If you follow my Oxford Bond Advantage trading service, you know I'm a huge proponent of planning for and benefiting from sell-offs. They are a fact of life and ignoring them or hoping the next one doesn't crush your portfolio is childish.
Three Ways to Protect Yourself - And Possibly Profit
Here are three ways to not only plan for sell-offs and down markets (in both stocks and bonds), but ways to turn them into big paydays, or at least limit their effects.
The first and most obvious, to accommodate this new precedent of taking depositors' assets as needed, is to not exceed the insurance limit in any bank account. I know this isn't rocket science, but you'd be surprised how many of us have been lulled into complacency by the FDIC and don't think about the limits of the coverage.
The big unknown in the deposit area is brokerage accounts, IRAs and 401Ks. There is a mountain of money in these accounts and, except for fraud and theft, they are unprotected. But, the real reason for concern is the government has been trying for years to get at those assets. The Cyprus deal may have opened the door.
For stocks, protecting yourself from the downside is simple. Hedge them with a broad market, short ETF.
There are many to choose from, here are just a few:
- ProShares Short S&P 500 (NYSE: SH), an S&P 500 short.
- ProShares Short Dow 30 (NYSE: DOG), a DOW 30 short.
- ProShares Short QQQ (NYSE: PSQ), a Nasdaq short.
- ProShares Short Russell 2000 (NYSE: RWM), a Russell 2000 short.
As the stock market drops, these short ETFs go up in value. They help to offset losses.
Just be sure to avoid the two times and three times return ETFs. These have all kinds of traps and little-understood downsides that can cost you money. Stick with the simple one times models.
Just be sure to avoid the two times and three times return ETFs. These have all kinds of traps and little-understood downsides that can cost you money. Stick with the simple one times models.
A Two-Step Strategy for Hedging Bond Positions
Hedging bonds can be done with ETFs, as well. There are lots of short bond ETFs, but bonds are a different animal and I prefer a two-step strategy. It allows you to invest in the current bond market, which eliminates the need or urge to try to time the market, and it provides a way to turn a long-term run-up in rates into a long-term bonanza.
The first thing you must do in this bond market, with or without anything resulting from the EU situation, is to avoid anything with a maturity of longer than seven years. This is an absolute! There is no wiggle room on this point. Any long-maturity bond or bond fund will be crushed when rates turn around.
If you own a bond fund with leverage and long maturities, you are in for the beating of your life. Get out now!
The second step is to stagger your maturities so you have at least one bond maturing each year for the next six to seven years. This is the magic in my bond hedging strategy.
As bonds sell off, obviously prices drop, and the yields increase. If you have money coming due at least once a year, you can buy into the rising rates. That means paying less for higher yields, and the yields can be huge.
In 2008 and 2009, I was earning as much as 50% real returns on high-quality corporate bonds. That's what buying into a sell-off can do for you.
Save Your Butt... And Make Money
Most people never consider hedging their stock portfolios. They think it's too expensive or it ties up too much money in positions that never return anything. But I guarantee, in the next few years, a hedging strategy will not only make money, it will save your butt!
Five-year highs on stocks, an all-time high on the DOW, a 30-year high on bonds, the EU confiscating money from the bank accounts of private citizens, the money presses running full tilt in Washington, corporations holding trillions of dollars in cash and virtually every stock has blown through its 200-day moving average.
Still not convinced?
Go back and look at the 200-day moving averages for your stocks in late 2007 and early 2008. You will see patterns almost identical to what we have now.
The worst case scenario of a downside hedging strategy for both stocks and bonds is that it will reduce or prevent losses in a sell-off and keep you in the game when the markets correct. And that is the only way you'll ever make money. It will turn a lot of lemons into you-know-what.
This is no longer an option. Hedge or be prepared for the inevitable. ...
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