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How the Market Works

Clear Perspective on a Volatile Stock Market: How to Invest

Posted by kdadmin on February 9th, 2016.

Clear Perspective on a Volatile Stock Market: How to Invest

A few days ago, a new friend asked me about investments. She was frustrated with how her current advisor was treating her more like a low number than a human.

While she didn’t need all of the technical details, she did want the big picture of how and why her money was invested during this volatile stock market. She wanted clear perspective.

So, I said …

(By the way: If you’re not technically inclined, read the first paragraph of each section and then skip to the next one until you land at Look at Your Cash Flow. You’ll get the gist without the technical slather.)

Look at the Big Picture.

Trying to make sense of the day to day market chatter is impossible. It survival of the screamiest. Better to take a step back, look at everything in the economy, and try to determine in which part of the market cycle we are. When that’s done, you’ll have a clear perspective of what is most likely to happen next.

Of crucial importance for the USA economy are things like:

  1. Gross Domestic Product
  2. Consumer Demand (Personal Consumption Expenditures)
  3. Manufacturing Demand
  4. Unemployment Rate
  5. Interest Rates (Federal Funds Rate)
  6. Inflation

Certainly, there are a dozen other ancillary indicators but if you can understand the six above, you are far ahead of the game. Next, you can get into things like Change in Real Personal Income, Per Capita Disposable Income, Personal Savings, Household Total Debt, Standards for Subprime Mortgage Credit, Case-Shiller Home Price Index, etc.

But until you really want to study economics full time, just stick the crucial six.

Determine the Market Cycle.

If you study economics, you will be able to tell which part of the market cycle we are currently in by how these six indicators are trending. There are several core cycles, and few transitional cycles. As a refresher, the core market cycles follow this order: Expansion -Peak -Contraction-Trough-Recovery – Expansion.

Different market cycles dictate different investment choices. For example, investors typically buy stocks during expansion and buy bonds during contraction. Of course, it’s not this simple, especially with over two dozen asset classes (big stocks, little stocks, bonds, real estate, etc). And it’s never that easy to tell when one cycle ends and another begins.

The most money is often made during the transition between cycles. For example, if you think that we’re approaching a market peak, you’ll likely be ready to sell off your stocks at a new high, and be poised to buy bonds when the market starts to tank. Of course, these choices need to be corroborated by supplemental trends (like global market activity), but you get the idea. If you can do this before the masses, you could end up buying at lower prices and selling at higher prices.

Look at Your LittlePicture.

Cheat sheet: We’re currently at the end of an expansion, likely approaching a peak in the next 18 to 36 months. If you look back at my posts in the How to Invest, and How the Market Works series, you’ll see why. Once you understand the economy, can read the indicators, and have a sense of what part of the market cycle we’re currently in, you’ll have a better sense of how you should personally invest.

If, for example, you believe that we’re approaching a peak, you’ll probably look at your portfolio, consider reducing your stock positions and adding to your bond positions.

Of course, it’s not this easy. You must know WHICH stock positions to sell and when. Sell too early, you could miss a rally. Sell to late, and your losses could mount. Buy too early and you could get pounded before a rally starts. Buy too late and you could miss a rally.

By the way, every asset class operates differently during each part of the market cycle.

So, unless you have made a career out of studying economics, modern and postmodern portfolio theory, asset allocation, correlation coefficients, and the like, you’re FAR BETTER OFF hiring a professional who has.

Look, I’m not trying to toot my own horn. Imagine the stock market is an automobile transmission. If you have no automotive training, are you really going to try to learn how all the bits and pieces of a transmission work so that you can be an amateur transmission rebuilder? Without the proper tools and data, you are very unlikely to have good results. It’s just not worth it.

Look at Your Cash Flow.

All investing requires an eye to your cash flow (your budget). IF investment losses have the potential to ruin your financial life, then you should not make the investment. Taking huge risks and suffering huge losses while chasing phantom opportunity is a sure way to bankruptcy.

It is imperative that you not only know what you are spending, but both how that spending is going to change, and how you are going to make enough money to meet your expenses. Frankly, if people would just take this one simple step in their lives, they would likely see an enormous positive impact on their financial future.

In an effort to help you face this challenge and be successful, I’ve prepared a free guide to orient you to the process and walk you though how to complete it.

The Picture.

When governing bodies enact stupid regulations, some people spend their time complaining. Others, figure out a way to work within those guidelines and still accomplish their goals. Take the FAA. Their recent ruling indicates that if I want to use any of the footage I shoot in the USA, with my drone, on my website, then I have to have an actual pilot’s license.

So I chose to get a balloon pilot’s license. Unlike an airplane, it’s an excellent filming platform, it’s normally completed during the best dawn light, it’s easy to setup, and flying a balloon draws on all the skills I already learned in scuba diving, sailing and kite boarding.

This shot is from my first flight as a hot air balloon pilot. Actually, from my first flight ever in a balloon.Taken about 500 feet above the painted desert of Tome, New Mexico, it certainly offered clear perspective for miles in every direction.

I chose this shot because a clear perspective is critical in volatile stock markets. Education without insight is pointless. Eventually, every investor has to put down their books, their subscriptions, their analyses and use their insight to make a decision to buy or sell. If you don’t feel confident about your ability to make an investment decision, you must find a professional who can make it for you. After all, doing nothing is a choice in itself.

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