In July of 2001, I had just received my enlistment bonus and had been in the military for less than 2 years. I had $800 in Lucent stock and $500 in other stocks; totaling $1,300. I had less than $300 in an emergency savings account. Several months after the stock market had collapsed from the 9/11 attacks, my $1,300 portfolio was nearly worthless.In 2007, I had become politically aware and more knowledgeable about the economy. Some of the political websites I followed started to discuss how bad the economy really was despite the media and the politicians saying the economy had never been better. All the data suggested the economy was perfectly fine yet some people had noticed the problems at the base. I began selling my stocks at 52-week highs. I looked foolish for several months preparing for the drop. Starting in October of 2008 the stock market began crashing, losing 18-20% in one week. By March of 2009, the major stocks indices dropped 50+%. I started buying back some of the stocks I had originally owned. Several years later I had many stocks double on me.
Now, in 2014, news articles are saying the economy has never been better and stock markets have never been higher. I believe there are significant problems at the base again. The national debt, almost $18T, Russia growing its empire and China doing the same are all world problems that soon, will impact America’s economy. Instead of worrying about a recession/depression like we’ve been doing for too long, we’ll see inflation come like a hurricane through our lives. Once the crash happens, the recovery, like always, will be on the backs of the middle-income taxpayers. The rich will come out unscathed and the poor will see little impact to them. By design, most of the people in the military are middle income and will be “punished” the most to help the economy recover. Over the past year, I’ve been preparing for the stock market to collapse and once again I look foolish, sitting on the sidelines while everyone is making money in the stock market. If you believe a crash is coming, like I do, then here are some of the investments I’m doing to prepare.
· Emergency Savings Account: I’ve been increasing my emergency savings account. Even though I have no real debt, I believe having available cash will give me flexibility to take advantage of a stock market collapse by buying stocks at cheaper prices which have crashed with the economy but there’s nothing wrong with the company.
· Eliminate all consumer debt: Except for a mortgage, and perhaps low-interest rate student loans, you should eliminate all consumer debt. As interest rates rise to help protect against inflation, your credit cards and other loans will also rise leaving you in a bad spot if you have limited flexibility in your paycheck.
· Start selling stocks as they reach higher levels: If you own individual stocks or mutual funds, then sell portions of your gains as they go higher. Like me, you may look foolish when others are making money; but if they never sell, they miss the opportunity to realize those gains. If you solely invest in the Thrift Savings Plan (TSP) you can request an Interfund Transfer (IFT) and/or you can change your allocations on www.tsp.gov to “sell” out of the stocks funds and move into the “G Fund” to protect your TSP portfolio.
· Gold: It may make sense to buy and hold gold through the collapse, but I recommend only holding gold for the initial panic. Gold has dropped from a high of $1,800 to less than $1,200 (a 30% drop). Gold will rise again when the stock market drops rapidly but if inflation rears its head, interest rates will rise and all the money currently in gold will go towards bonds to earn a “safer” rate of return. In 2003, an average high-yield savings account was earning 5% and Gold was less than $300. It may not go down that low for a long time, but it will go below $1,000. Gold will remain high as long as our national debt is at 100+% of our Gross Domestic Product (GDP), currently at 103%.
· Dividend stocks: As the stock market collapses, many companies will offer a higher dividend yield as the stock prices fall in relation to its dividend. Some companies will be just fine and recover nicely. If you had invested in them at the bottom, then you’d have a very nice dividend yield. In his book, Getting Back to Even, Jim Cramer calls these stocks “accidental high yielders”.If you are using different strategies or you disagree about my prediction, please let me know by leaving a comment.