Diversify - No I'm not talking about your wardrobe or giving advice on dating. I'm talking about your investment portfolio. Your investment portfolio that is. Diversification of a portfolio helps the investor to minimize loss in a downward market and to take advantage of gains of an upward market. With diversification you can actually make money when the market goes down.
How so? Take for example the US economy. Right now it's booming. In fact many investors like Goldman Sachs or Merrill Lynch say 2018 is a great year to invest. What they're talking about is investing in equity stocks. Microsoft, Amazon, Apple, Etc. Its an aggressive outlook. They're feeling bullish.
But let's say the US economy takes a turn for the worse? What do you do? Well one thing you can do is hedge against a downward U.S. economy by diversifying your portfolio with foreign stocks. Or let's say you want to keep your money growing in another manner because you don't trust foreign governments. Typically when stocks go down, dividend stocks like utility stocks do better. Utility stocks are good in a downward market because that is when they grow the most and on top of that they offer dividends. Dividends is money paid to investors from capital gains.
Let's say the amount of the stock cost $10 and ABC utility stock offered a 5% dividend. Well the amount of the ABC utility stock would then go down to $9.50 and the investor would be awarded a 50 cent dividend per stock owned. Dividends are typically paid quarterly and the 50 cent dividend would be based on an annual return. Quarterly dividend = .50/4. Another way to offset loss in a downward market is to buy gold. Typically when stocks go down the price of gold goes up.
The reason why I'm writing this article is because of what I know through experience and what I see currently happening in the market. I know that an upward market cannot last forever. In fact, a huge spike in the market often means there's going to be a huge dip. We've already seen this with Bitcoin or with the US market in February 2018.
2017 the US economy was doing better than ever. Everyone was investing. I know I was. Bitcoin was booming. People thought Bitcoin was the best thing that ever happened. Some even put their life savings in Bitcoin. Some sold their homes and moved their families into boats or RVs counting on Bitcoin to be their road to financial freedom. I'll tell you one thing, none of those people ever spoke to a Stockbroker or a Financial Advisor about Bitcoin. Because that Financial Advisor would have told them that they were doing it all wrong.
Unfortunately, many of those people lost big. But especially those that invested with Bitcoin. Some of those Bitcoin investors were really excited about the market and thought that they were Stockbrokers or at least acted like they were. They were giving advice and investing their friends' and family money. They opened up YouTube channels, Twitter pages, Instagram and gained a massive following. Majority of whom don't know a thing about economics, none have their series 7 or series 66 licenses (Basic Stockbroker licenses).
Other small companies that sold digital currency capitalized on the good market and took advantage of many. But like my Financial Advisor always says, "Everyone is a professional stock trader until the market tanks." He says, "It's when the market falls that your good Economists, Stockbrokers, and Financial Advisors are revealed." And when Bitcoin went down as did all the other cryptocurrencies people lost big. Some lost everything. I hate to say it, but I saw it coming.
One thing I understand about the market is that ANYTHING that goes up must come down. This is the very basic truth of investments. Now where are all the pro Bitcoin traders? After all, they're all losing money. Every single one of them. Anybody who invested their entire portfolio or majority in Bitcoin and tells you that they're doing great isn't telling you the truth. Please don't be fooled! I'm sorry but it's the truth.
You only need to see for yourself. Type BTC in Google (This article was posted 2/14/18). Look at the technicals (Lines that look similar to a heartbeat. Currently looks like a dead heartbeat). Because I'm in the industry I know how to verify if someone is a licensed professional or not. For Stock Brokers you want to search for their Finra ID number. All Stock Brokers must be licensed through Finra. I've researched several hundred YouTube videos and could find none that were Finra certified. I went through several Twitter pages and none of those who claimed to be crypto experts were licensed either. The only money that these so-called experts are making are from their advertisers.
Where are all the so-called Bitcoin guru's now? Many of them fell off and many of the investors have sold their Bitcoin and say that they will never invest again. Some say that might be a smart move. But I know that it isn't a smart move either. You might be surprised to hear that. I'll explain, but first they should have never put all their eggs in one basket. Meaning they should have never put everything they had on Bitcoin or just one stock for that matter. When Bitcoin goes down what was their plan? Sadly this is a question that not a single one of them asked themselves. If you take nothing else from this article please just remember this...
Plan for a great economy. Strategize for a bad one.
So why do I say they should have never sold bitcoin? Because you only lose when you sell. Bitcoin will eventually go back up. Despite what you hear, Bitcoin and digital currency in general isn't going anywhere. I feel it's the future. But right now there are a few kinks to work out we'll say. Have you ever heard of the saying Buy Low, Sell High? Look at Bitcoin right now. Would you say it's a good time to sell or good time to buy? Well I'll let you decide that for yourself but every good investor knows buying low and selling high is the way the investment game works. So if you like Bitcoin, buy it when it's low. Don't just jump on the wave while it's already at full peak because it'll go crashing down on you.
During the 2008 crash in the market Economist Ben Stein told everyone that NOW is the time to buy. Everyone thought he was crazy. But look at the market since then. What happened? It went up. It didn't just go up, it flew up. Everyone who listened to Ben Stein is happy they did. And everyone who ignored him? Well they missed out big. When you see a good stock drop, BUY.
So now, you understand what you need to do. Strategize for the next downturn in the market. So here it is, my strategy. I call it 4x4. It should be the base of your portfolio of which you can build upon. I like to think of 4x4 like a strong truck navigating through smooth and rough terrain. Ready for anything that comes it's way.
A minimum of 4 stocks in 4 different sectors. Total of 16 stocks.
Within those four sectors you are going to need to find four investments to buy. Because of my license I am an not legally allowed to recommend anything specific. Speak to your Financial Advisor or you can ask me for an FA referral and I'll be happy to send you one. You could even go on Barchart.com or Finviz.com and see which ones are doing good. Be sure to look at their 4 year average. Also make sure the rate of return corresponds to your goals. See The Rule of 72.
I know I said 4 but if you're feeling adventurous, one of the stocks could be for those Bitcoiners out there. Because we don't know much about Bitcoin and it could possibly be a really good thing, the investor could have invested maybe 1% to 5% of their portfolio in it just in case it turned them into millionaires. Hey you never know. Some actually did become millionaires. Hope they hedged against a loss. But I would never put in more than that. And that's where Bitcoiners went wrong. Never go more than 1% to 5% on an adventure stock. If you do lose big on your adventure stock at least it was a small portion of your portfolio.
So you might ask, 'How do you hedge against a dip in Bitcoin?' Well you can't directly hedge it with another stock because it's too volatile. But you can hedge it in proportion to the rest of your portfolio. Hence investing no more than 1% to 5%. Might not be what you want to hear. I know, I know, you have investor fever! Don't look at the stock market like a Casino because it isn't. And if you do look at it like a Casino you'll always lose.
At what percentage you choose to do each will depend on your investment strategy. And here's another thing, my strategy can change. It depends on what's happening in the world. There's a strategy for everything. The strategy I recommended is a basic strategy for the current market to make sure you keep making money and are protected at the same time. The idea is to have one category of stock hedge against the other in order to keep your portfolio moving up. If you want fast growth well then you'll probably want more equity stocks then bond stocks. If you want a little more security then you'll probably want more bond stocks.
There are more sophisticated hedging strategies I could get into like options, shorting, debit spreads, calls and puts, but I'll explain more about those and other specific strategies in a different blog. Those are for experienced traders and are very risky. Another thing you may want to consider is leaving it in the hands of the professionals. There's a reason why over 99% of traders fail.
A Financial Advisor is on the inside and knows exactly what to do. My Financial Advisor is so good at what he does that he lives off of day-trading. The money he gets from managing his clients accounts all goes straight into his savings. He's a genius. In either case I encourage you to get smart and to do research on your own or even better, speak to a Financial Advisor.
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