4 Steps to Make Money when the Stock Market Crashes

The DOW Jones has fallen to around 16,000 after hitting a high of 18,300 on May 2015; a 13% drop. Depending on what you’re invested in, you may have seen a large drop in your TSP, 401(k), or your taxable brokerage account. If you’re under 55, you should see this as an opportunity. If you’re over 55 and you’ve seen a 13% or more drop in your portfolio, then you’re not correctly investing your money in the first place. For those under 55, stock market drops can be a good thing to take advantage of. Here’s how:

• Put more money in as the stock market drops. Most people have their retirement savings on autopilot. TSP and 401(k) contributions are automatically taken out of our paychecks. Some people also have IRAs and a taxable account as well. As the stock market is dropping, you should increase the money you’re putting in your TSP or 401(k). For military members, you can go to MyPay and change the amount anytime you want. For civilians, you’ll have to use your online retirement system or go through HR. Remember, you can only put $17,500 a year in a retirement account.

o    As the stock market drops, you’re able to buy more at the lower prices. Think about it like a sale on stocks or a military discount. You can buy your favorite stock at a 10% discount when the market falls.

• Find high-paying dividend stocks. In Jim Cramer’s book, “Getting Back to Even,” he calls stocks that pay high dividends because their stock price fell, accidental high-yielders. When World Wrestling Entertainment’s (WWE) stock dropped, its dividend rose to 4% and I bought it. There are many dividend-paying stocks whose dividends rise because of the overall stock market dropping.

o    This mainly applies to people choosing their own stocks or mutual funds. You can use any stock screen to find these. I like Yahoo! Finance and Fidelity’s stock screeners. I search for stocks that have fallen with a 3% or higher dividend yield.

• Avoid selling stocks. Over the long term, people who sell stocks automatically after a certain % drop tend to lose money. If you’re buying individual stocks, then you should only buy and sell based on a company’s fundamentals and not stock movement. 99% of the DIY investors Buy High and Sell Low because they are too emotional. When Tesla (TSLA) hit $290, a friend got excited and recommended it to people because he wanted to be a part of the stock’s rising price. Unfortunately, the stock lost steam and, at one-point, fell back down to $180; yet my friend was no longer promoting the stock at the discounted price.

o    If you know you’re emotional then avoid buying and selling individual stocks and mutual funds. You’ll lose money over the long run.

• Don’t time the market. People often wait on the sidelines for the perfect moment in the market drop. They’re so scared of investing at the wrong time that they miss an opportunity all together. This is the major reason why after nearly two decades of DIY investing that I’m not a billionaire; because I’ve incorrectly timed the market. I’ve bought on the way down (low) and sold on the way up (high). Don’t worry about trying to find the perfect time to buy. If your portfolio is less than $1M, then minor changes in your returns/losses will be less than missing out on opportunities all together.

Buying low and selling high seems like such an easy system but when the stock market declines or increases rapidly, people often do the opposite. This psychological response is why gambling is so profitable for the “bank” and so disastrous for gamblers.

Being Fearful When Others Are Greedy, Moving Into The G Fund

Warren Buffett once said, “Be FearFul When Others Are Greedy and Greedy When Others Are Fearful.” With the stock market hitting all-time highs...I’m fearful.

In November of 1999, the NASDAQ (major index tracking mostly technology stocks) hit an all-time high of 4,303 during the “dot.com” bubble. Now in June of 2015, the NASDAQ is sitting at 5,160 jumping from a bottom of 1,476 in November 2008. While most people are encouraged by this upward movement, I am fearful.

Military members and federal government employees can take advantage of the Thrift Savings Plan (TSP) which allows them to invest in specific funds in a 401(k) like program. When an investor contributes to the TSP it automatically invests in the “G” Fund which invests in Government Securities. It’s the safest fund yet offers very little returns. Since 2008, I’ve been advising people to move their money out of the “G” Fund to take advantage of returns after the financial collapse in 2008. For most people I’ve recommended not being in the “G” Fund at all. That advice was spot on for those that listened. For those that kept their money in the “G” Fund, their portfolios have barely moved.

For nearly 7 years, we’ve enjoyed a stock market rally fueled by historically low interest rates and two administrations (Bush and Obama) with uncontrollable government spending. Both of these have artificially pumped cash into the pockets of corporations and the people who, then in turn, spend it quickly. With our National Debt over $18T, these low interest rates and government spending can’t last forever. Despite gas prices going lower, all others commodities in our lives have seen price increases. As I joked in a Facebook post, “Inflation is coming”; borrowing the ominous warning from Game of Thrones.

I believe there will be a stock market drop soon. I believe Thrift Savings Plan (TSP) investors should consider moving money back into the “G” Fund to protect against major market drops. Each investor is different, but if the investor is under 30 then they should consider putting about 10-15% in the G Fund. If the investor is 31-45, then I recommend 15-35% in the “G” Fund. Anyone over 45 should very carefully analyze their current financial position and evaluate retirement goals before deciding on how much to put in the “G” Fund. If the retirement goal is to retire at 55, then there should be a larger percentage in the “G” Fund and if the retirement goal is later, then less in the “G” Fund. Retirees should be careful not to take all their money out of the stock market though with average life spans reaching 85 years old—they’ll need to make their money last better. As interest rates rise to fight inflation, investors will see increased returns in the “G” Fund as well.

Investors can either go to MyPay or change their allocation to start moving money into the “G” Fund or they can use one of their two a month Interfund Transfers (IFT) to move money out of one fund and into another. They can do this through www.tsp.gov. Please do your own research before making any investment decisions, but I really feel that this 7-year long rally is about to end.

A Major Collapse is Coming

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.

Stocks to Consider (November 2014)

I’ve made most of my returns through sound value-investing principles. Buying stocks at cheap prices because of temporary weakness, either in the company or the sector, has provided me the best returns. I’ve lost the most money by using other investing principles and ended up buying at the high point and then having to sell at a loss. In my opinion, a good value strategy in this rising market may be Solar Energy stocks.

The two companies on my watch list are First Solar (FSLR) which is the industry giant and SunPower (SPWR) Corporation which has a huge presence in the deserts of California. FSLR once hit close to $180 in Feb/Mar of 2011. As of 13 Nov, its 52-week high is at $75 and is currently trading at $48. SPWR once hit $130 in 2008 and its 52-week high is at $42 and its currently trading at $27. SPWR has been on a tremendous run since the end of 2012, being as low as $4 in November 2012, as it gains more momentum in the industry.

The Solar Energy industry was the darling of the stock market when Al Gore’s “Inconvenient Truth” swept through the world; putting alternative energy options in the spot light. Ever since then, politics have shied away from the Climate Change debate, focusing more on the struggling economy.

The alternative energy is politically dependent. As the Republicans take over the House and Senate, I imagine the industry will suffer and stock prices will go lower, providing ample opportunities for value investors. In 2011, the solar-cell company, Solyndra, filed bankruptcy after receiving a huge grant from the American Recovery and Reinvestment Act. The company was a major donor to President Obama’s presidential campaign. Once the company filed for bankruptcy, the administration dodged all implications of corruption costing the taxpayers $385 million, once/if the projected $142.8 million is recouped. The executives all received “golden parachutes.” Instead of the administration taking the hit, the solar energy industry took the blame and climate change discussions were halted.

These temporary political weaknesses may give us an attractive buying opportunity this year and into 2015. I think the industry will continue to expand with or without political support. Once the support has returned, the stocks should skyrocket. It’s also satisfying to invest in industries you feel good about. As always, be careful taking stock advice from any blogger.

DISCLOSURE: As of this writing, I’m not currently invested in FSLR or SPWR but will most likely buy soon.

Should I Be Concerned About High Frequency Trading (HFT)?

What is High Frequency Trading (HFT) and should you be concerned? I’m sure you’ve recently seen some news reports about HFT and depending on your news sources’ political bias it may oppose or support HFT. The audience of this blog is primarily military members E1-O6 and knowing that, my personal opinion, is that High Frequency Trading should not concern you, from a threat to your financial goals perspective. HFT doesn’t prevent you from reaching your financial goals nor is it “stealing” from you as some articles suggest. It may impact your ideologies, in terms of right and wrong, fair or unfair, to tax or not to tax; but as far as your financial goals, HFT should be irrelevant to you.

High Frequency Trading (HFT) is a term used for computer programs that execute millions of trades within minutes. The HFT you are currently reading about is used by Stock Exchanges to match buyers of stocks will sellers of stocks and vice versa. For each trade, the HFT earns $.0015[1] or somewhere around there, but multiplied my millions of traders per day. Your first thought should be quoting the “Office Space” movie where the protagonist is explaining that he is “taking” a fraction of a penny, so it’s not really stealing and Jennifer Aniston rightly rebuts, saying it is “stealing.” The difference between the Office Space movie and the recent HFT articles is Accounting principles actually account for those fractions of pennies, so taking them is really stealing. The HFT you are reading about is actually part of the system, right or wrong, it is a necessary “evil” for our stock exchanges.  For every buyer there has to be a seller and these HFT machines provide that service. The problem is now we have HFT machines placing buy and sell orders a million times a day and other HFT machines placing those purchases. If the market moves in a way different than the HFT is programmed to handle, the market could swing wildly, affecting our 401(k)s, TSPs, IRAs, and investment accounts. On May 6th, 2010 this scenario happened and the DOW Jones lost 1,000 points or 9% in less than an hour[2]; but, it was the same HFT computer programs that enabled the market to bounce back to normal. NOTE – I was at work when this “flash crash” occurred and would have loved to buy stocks during that hour and get some quick returns.

Should you be concerned? As of now, no, you shouldn’t be concerned. HFT trades makes up 50%[3] of the daily activity on the New York Stock Exchange and some articles use that number to scare you; however, the large investment banks still hold a majority of the stocks in mutual funds providing a balance to the market. So until something changes, HFT provides both a scary volatility and a scary balance to the stock markets. You should continue applying sound financial principles and HFT won’t affect you. 1) Establish an emergency fund 2) Eliminate or Reduce Debt 3) Max out tax-advantaged accounts TSP, IRAs, 401(k)s, 529 plans, 4) Save and invest everything else. HFT sounds scary, but for us normal investors, it doesn’t affect us. If another flash crash happens, it could provide an opportunity to buy. If a flash increase happens, it could provide a solid selling opportunity.

Final Thought:  Values of anything have increased wildly in a massive bubble creating winners and then popped, leaving losers, even before computers were invented. One of the first examples of this is the prices of Tulips in the Netherlands in the 1600s and High Frequency Trading was not around then. Getting rid of HFT won’t stop bubbles from forming and won’t collapse the whole financial system. Until something changes, keep investing smartly by diversifying and avoiding fees and taxes. 

---

[1] http://www.investopedia.com/terms/h/high-frequency-trading.asp

[2] http://blogs.wsj.com/marketbeat/2010/05/11/nasdaq-heres-our-timeline-of-the-flash-crash/

[3] http://www.investopedia.com/terms/h/high-frequency-trading.asp