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How Our Clients Made Money During the Worst January in History: How the Market Works

Posted by kdadmin on February 27th, 2016.

How Our Clients Made Money During the Worst January in History: How the Market Works

Recently, one of my clients told me it was okay to gloat a bit. So, here goes.


This is how we did it …

How Our Clients Made Money During the Worst January in History.

First, we held more than half of our money in intermediate term bonds. Don’t know what a bond is? LEARN. When the stocks market sucks, there is plenty of money to be made in bonds. Interested now? Stay tuned for my upcoming bond primer: How the Bond Market Works and How to Make Money with Bonds.

When you read my primer, you’ll now know that when the stock market goes down, bonds generally go up. I’m talking about bonds in the aggregate bond index, tracked by the ETF, AGG. These are generally mid quality (not junk), short to mid term (3-8 years), corporate bonds. Junk bonds are not a good idea in a volatile market as junk bonds have a much higher default rate than mid quality bonds. Mid term bonds are generally a better idea during interest increases because they are less sensitive to interest rate hikes (i.e. the Federal Reserve raising rates) than 30 year bonds, and they pay more dividends than short term bonds.

Anyway, when the stock market tanked, the bond values shot up. Having more than half our money in bonds meant the January Disaster was a boon for us.

So, how did we know to be in bonds in this market? Read my strategy piece, How to Invest in 2016: Cash is King, dated December 31, 2015. And, then read my articles in theHow the Market Works segment. There are a LOT of moving pieces in the economy. But, if you understand global, modern, and post modern economic theory, it tends to make sense. If you don’t know what that is, and neither does your advisor, you better hire someone who does. I’m just sayin’.

We Waited for the Apocalypse.

Second, there is a time in every market correction where everybody who should have sold but didn’t, or should have told their clients to sell but didn’t, starts talking about a Market Apocalypse. You know what I mean. It’s an End of Days scenario. Stupid stuff like the End of America, or Currency Wars that destroy the world, or a 99% drop in the stock market, or an unprovoked nuclear attack, or some conspiracy theory about secret societies.

All of this crap is simply a way to shift the blame. If a secret society is overthrowing the market, then it’s not anybody’s fault that they didn’t sell out. Because, somehow, a secret society is more powerful than market forces. It’s stupid.

Anyway, once we start to get this type of rhetoric from seemingly “intelligent” news sources, which usually coincides with about an 11% loss in couple of weeks scenario, we start to look for an entry point into stocks. If you read my strategy piece, How to Invest in 2016: Cash is King, our research suggested a low positive return in 2016, 2017 and 2018. So, if the market was off 11% and your research said it would finish even or slightly positive over the next year or so, wouldn’t you buy at a discount?

We did.

Now, we didn’t buy a lot. Just enough to get a little bump in returns for the year if the market finished flat. But not enough to destroy our clients’ lives if things went south. I’ll let you figure out how much that is. It’s this sort of strategy that let us finish up several points last year when the S&P 500 finished down; even though we sat in cash for nearly half the year.

What Can You Learn From This?

Keep calm during a catastrophe. Look for opportunities when everybody else is running for the exits. If it smells like an opportunity, wait until it’s a REALLY GOOD opportunity. Don’t buy in too soon. Apocalypse is usually a good sign.

Learn about bonds. Telling me that you don’t use bonds in a portfolio is like telling me you drive a car without brakes. It makes no sense. By the way, there are about 23 investment asset classes from which to build a portfolio. Stocks only make up about 1/3. So, get educated or hire someone who is. No reason to miss an opportunity to make money.

The Picture.

That’s me in the middle manning the balloon burners. I’m about to take off during my first balloon rally in Albuquerque, New Mexico. It was Valentine’s Day, 2016.

Piloting a balloon is a lot like managing money in a wicked market. It’s totally dependent on where the wind is blowing. Winds blow at different speeds and directions at different altitudes. Wind is affect by both natural and man madephenomena either nearby or thousands of miles away. Like the market, it’s not possible to read the wind directly. Instead, it requires countless hours of study to observe secondary signals, quickly interpret them, and take decisive action.

I like hobbies that enhance the skills and habits I need to be a better investment manager. It certainly pays off.


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