Crash Test Dummies
Do you want to crash-proof your portfolio?
A lot can be learned from a near disaster.
The last 15 trading days in the stock market has been an actual disaster for many investors.
In the past three weeks the S&P500 fell from 1356 to 1100 bringing down world equities and eliminating $5.5 trillion dollars of wealth worldwide.
Historically, during crashes people panicked into long-term (30 year) US government bonds and the US Dollar. Even though people moved into US government bonds this time they moved into shorter maturity bonds (10 years or shorter) AND there was zero movement into the US Dollar.
Perhaps it has finally dawned on the general public that loaning a bankrupt government money for 30 years is a bad investment. Investors are waking up.
This time around people sought the safety of gold, gold mining shares and Swiss Francs.
While in the past few weeks the S&P500 fell 19%, gold increased 21%, gold mining shares stayed flat (gold mining stocks were the best performing sector out of 239 sectors during the crash!) and the Swiss Franc increased by 17%.
What surprised me was the speed that people indiscriminately dumped their stocks. The market drop of the past 15 days was even faster than when Lehman collapsed: Has the returns of the past ten years of the stock market finally killed the “buy and hold” strategy? Well, it was not a very good strategy anyway.
What the last three weeks mean:
– Gold has become the safe place for investors.
– The only fiat currency people flocked to was the one most recently backed by gold (the Swiss Franc was taken off the gold standard in 2002).
– Low interest rates are here to stay. That means Savers are going to be penalized and forced into more volatile investments for the promise of higher returns.
In order to not feel like a crash test dummy, make sure you are truly diversified into different strategies (as described in Millionaire’s Academy) and not just different stocks.
Together, we are protecting and growing your wealth,
1 Comment
IvanH.
August 12, 2011Yes, it's been very interesting watching the market the past few weeks. I also observed the movement in gold prices as investors piled in. I also noted the Fed's pledge to not raise rates until 2013. Your call about interest rates was very prescient at the July meet-up.