Are you Prepared?
August 25, 2015. The past week in the market has shown us that while we should hope for the best, we need to be prepared for the worst. By nature I am an optimistic person, but there are ominous economic signs that disturb me.
Market Volatility. This past week has been a rollercoaster ride in the markets. Is the ride over? I don’t think so. At the markets close on Monday 8/24 the S&P 500 was down over 8% for the year; the Nasdaq down over 4%. I believe there are a lot of warning signs that point to more volatility and world economic angst… China’s downturn, falling oil prices, anemic worldwide economic growth, historic budget deficits, middle east unrest, most countries have an unhealthy debt to GDP ratio, projected Medicare and Social Security funding shortfalls, underfunded Government Pension Plans, deflation pressures, these are just some of the issues. A major question we face is; are conditions ripe for another 2000 or 2008 market collapse? I don’t know, but believe it is possible. I believe our nation and (the world) are at an important crossroad and continuing on the current path could derail us. Following are things you should consider…
Prepare for the unexpected. You never know what can happen; I believe preparing for risk is prudent. Risk comes in many forms; basically, the purpose of insurance is to shift risk. A strong El Niño or even a massive earthquake could wreak havoc on local infrastructure, the power grid or the internet/communication system could crash, the economy could even collapse, (most people do not understand how close we came to this in 2008). There are countless other scenarios that could cause societal, economic, and infrastructure disruptions. Unfortunately, our tech-centered society is ill-prepared for disasters, especially in cities. Studies show that when people go without necessities like food or water for several days, they may get desperate, and chaos, even anarchy often breaks out. Remember Katrina? I am by nature a planner and like to be prepared in the event of emergencies large and small. Experts recommend that you have emergency cash stored away in the event we get into a cash-only situation. Ask yourself; Am I prepared in the event that I cannot purchase food or gasoline with my bank card? Have plenty of emergency food and water stored (at least 2 weeks), keep your car fueled with at least a half tank at all times, candles, flashlights and batteries, an emergency medical kit and spare medications. If you prepare properly, you will endure the aftermath of most disasters.
Asset Protection: It is in volatile times like these where we believe the buy and hold strategy is flawed. The 2008 crash was an equal opportunity event, where all asset classes where hammered; diversifying didn’t help much. If you are in or close to retirement, these types of events can devastate your nest egg. Consider this…. If you lose 50% of the value of your portfolio, it will take a 100% gain, not 50% gain to break even. Don’t believe me; here is the math… $100,000 with a 50% loss equals $50,000. A 50% gain will only get you back to $75,000. $50,000 plus 50% of $50,000 ($25,000) equals just $75,000. You will need $50,000 or a 100% gain to break even.
Steps RNA Financial took. It has been a strange year; a market with no direction. In late July we started to see some disturbing indicators and began our slow exit/hedging strategy from the market. On Monday August 17 we accelerated moving away from most of our market sensitive positions. Currently, our clients are just 25%- 50% invested in the market. We initiated a hedge position for all of our clients in the VXX index ETF at $17.95 which moves up with market volatility. We sold that position Monday 8/24 morning at $25.62 for a quick 43% gain. We plan on initiating other positions in the VXX when we get a strong entry signal. The VXX trades are short term, but can reap huge rewards if executed properly. We still hold Apple, as we believe the stock is undervalued and should have a nice run up to their September 9th event, where new products and enhancements will be unveiled. I believe the apple watch will be a big hit and is positioned well for a strong Christmas. We will be watching this closely. We purchased a small percentage of the world’s largest gold and silver streaming company at the bottom of their price channel several months ago and are waiting for it to get to the proper sell point. We hold three industry-specific ETF holdings XLE-energy, XLU-utilities, and AMJ-energy pipeline master limited partnership; all these together total approximately 7.5% of the total portfolio. I do not believe the Fed will raise rates this year, but am staying away from bond ETF’s and other interest rate sensitive investments as they are very volatile.
I want to be clear, I am not predicting a market crash or some other calamity. However, I want you to understand the importance of preparation in the event of disasters, both large and small.
“A sensible person sees danger and takes cover, but the inexperienced keep going and suffer.” Proverbs 22:3.
“Those who cannot learn from the past are condemned to repeat it”. George Santayana
These are the personal opinions of Russ Brown only and are not to be deemed as specific investment advice