I had a potential client call me just the other day in a tizzy about his investment assets, which were not with us by the way. He asked my opinion on what he should do with his investment assets.
The options he gave me: (1) move to cash or (2) buy gold.
Now to me, he seemed to be getting a bit irrational. However with 24-7 media coverage anywhere in the world, it is easy to get irrational.
I told this potential client, that he needed to understand that bull and bear cycles have occurred since the formation of organized exchanges used for buying and selling stocks and commodities. These bear cycles always correspond with times of economic uncertainty. For every period of economic uncertainty, there has always been a larger period of economic growth that more than makes up for the period of uncertainty.
I also suggested these four ways to overcome the current market and economic fears:
1) Make sure you are in the right stock strategies for the right market period. This current period is called a secular bear cycle. Such cycles typically last 17-25 years on average and generate low, low single digit returns (positive or negative) over such periods. I told him the strategies that work best over such periods are trend followers (see InTrust Advisors) and very short term trading strategies that prosper from the increased market volatility, such as many option strategies.
2) Stay very diversified and don't be afraid to hold a much larger cash allocation. In fact, one of our strategies moves between fully invested in bull markets and cash in bear markets based on our trend following models. It is currently in cash with a small allocation to gold and treasuries, but the bulk of the holdings are in cash currently and this is just fine with our clients. Holding cash is ok!
3) Holding gold is ok, but realize that when margin calls are made gold will be called away to meet margin requirements. This means gold will decline in a bear market (see 2007-2008 market for proof). So don't go over board on your gold holdings. A 5-10% allocation is all most people will ever need.
4) Many times the best investment you can make during times of low or negative single digit returns is to pay off debt. If your home equity line of credit is costing you 8% and the markets are going to yield a zero or negative return, pay off the debt. It is a sure 8% return on your dollar.
To my surprise, this potential client then asked why I seemed so calm. I told him, not only do I feel like I have the right investment strategies for the bearish period ahead of us, but I have my own financial house in order. I also told him that my faith has taught me just to worry about today, because today has enough worries of its own. He appreciated the suggestions and told me he would get back to me.
That was two weeks ago. My guess is the 24-7 media coverage has once again caught him up in worlds uncertainty. However, I feel I gave him a pretty good road map for the next 12-24 months or more. If he would just follow the suggestions I have outlined above, I have no doubt he would come out of this economic and market downturn smelling like a rose.
