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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Protect Your Wealth, Your Money Could Be Worth 39% Less Than You Think!

Stock-Markets / Financial Markets 2010 Nov 15, 2010 - 08:07 AM GMT

By: Larry_Edelson

Stock-Markets

Best Financial Markets Analysis ArticleThese days it seems that almost everyone I know is playing it ultra safe in their investments. Generally, that’s a good thing that I whole-heartedly endorse.

But with Washington and the Federal Reserve hell bent on devaluing the dollar — and succeeding at it — being safe with your investments is one of the most dangerous, riskiest things you can do.


For instance, suppose you put $100,000 in a money market account earning 4% a year back on January 1, 2002. Compounded daily, you’d have $143,247.16 as of yesterday.

But over that same time period, the dollar has lost almost 39% of its international purchasing power. So, what one dollar bought in 2002, will only buy roughly $0.61 worth of goods and services today.

The U.S. dollar has lost 39% of its international purchasing power in the past eight years.
The U.S. dollar has lost 39% of its international purchasing power in the past eight years.

In other words, in terms of its current purchasing power, that $143,247.16 in savings that you accumulated and thought you protected so wisely — is really worth only $87,380 — nearly 39% less than you thought!

Put another way, your original $100,000 is worth almost $13,000 less than what it was worth in 2002!

Great deal, eh? A safe investment that actually ended up destroying a good portion of your money.

Moreover, going forward, this kind of shrinkage in the true value and purchasing power of your money is only going to get worse, especially if you invest in Treasury notes or bonds, which are now starting to plunge in value because of the Fed’s incessant money printing.

Reason: The dollar will continue to fall … the value of your bonds will fall as the dollar sinks … and you’ll ultimately lose much more.

That’s especially true now, not only in the aftermath of Ben Bernanke’s massive money printing spree, but also because the latest G-20 meetings are a joke and will do nothing to prevent the dollar from falling more.

Don’t get me wrong. Even if I made nothing on my savings, I’d still save. Spending within your means and saving for a rainy day is an essential part of any financial plan, even if your savings isn’t making you a dime.

But not all of your savings should be hidden under the mattress so to speak, in money markets, treasury notes and bonds, even treasury bills.

In fact, cash and cash equivalent types of investments should be the smallest part of your portfolio.

In my opinion, the only cash you should keep on hand is roughly six months worth of living expenses.

The rest of your money should be invested in assets that are going to benefit from what the Fed is doing to the dollar. Heck why fight the Fed, even if you disagree with their policies, when you can protect your money and profit from taking advantage of the right investment?!

Including …

#1. Select foreign currencies, which are rising in value against the dollar, and where you can also get a nice return. Two of my favorites right now are the New Zealand and Australian dollars.

#2. Select foreign stock markets, especially those that are rich in natural resources and where billions of new consumers are driving their economies upward. Examples: China, India, most of Southeast Asia. And Latin America!

#3. Select natural resource companies that control in-demand commodities … the very same commodities that are also rising in value as the dollar plunges.

The list includes gold … oil … gas … iron … steel … aluminum … zinc … nickel … uranium … wheat … corn … soybeans … sugar … coffee … even water!

Want a sense of how much money can be made in natural resources?

Take a look at the recent performance of the recommendations from my Real Wealth Report. As you can see from the table, my subscribers are making hay in these markets, and they’ve been doing so for years now.

Moreover, I consider most of those investments to be essential and actually conservative.

Also, no matter what, when investing in any market, always keep my five cardinal trading rules in mind …

Rule#1. Maintain a flexible mind and outlook. Understand this: The markets have a mind of their own, so if you want to fully understand them, it’s up to you to be flexible!

That means not having any preconceived notions about what the markets can or can’t do, and further, recognizing that in the short- and even intermediate-term, news has almost nothing to do with market trends.

That’s why I never — I repeat, NEVER — listen to the news when I’m trading. Nor does any successful trader I know.

It’s also why I am able to stay flexible in my trading, even if it means going long in the midst of the worst bear market in decades, or, short in the biggest of bull moves.

Rule #2. Be willing to be wrong. This is a critically important rule. Because if your focus is on being right, not only will you waste a lot of energy, it will subconsciously make you inflexible and bring about the very outcome that you were worried about to begin with — being wrong!

Being right or wrong has nothing to do with trading and everything to do with your ego.

But ego has no place in the markets. Stick your ego in the markets, and they will devour it faster than you can blink.

So if being right has very little to do with making money in the markets, then what does?

Rule #3. Risk small amounts of money and always control your risk. For instance, suppose you have $100,000 in a trading account. And let’s say you decide to risk 20% on each trade. If you’re wrong five times in a row, you’re out of capital.

Even if you’re wrong just three times in a row, you’ll wipe out 60% of your account on just three trades. By then, you’ll be so psychologically wounded that you’re bound to make a multitude of mistakes with the remaining 40%.

But if you risk, say, just 2% per trade, you would have to be wrong 50 consecutive times to get wiped out.

See the difference? See how the odds shift in your favor when you strictly control risk?

You’re going to be wrong — a lot. Period. But if you limit your risk to very small amounts, while letting the profits run when you are right — you can make a lot of money even when you are wrong more often than you are right.

Consider the following example: You have a $100,000 account and you have 10 losing trades in a row, where you lose 2% of your original capital on each trade. So you’ve lost 20%. You’re down 20,000 big ones.

Then on the 11th trade, you make a 30% return on your capital when the trade is put on ($80,000). That would be a $24,000 gain. And on the 12th trade, you make another $24,000.

Your $48,000 in gains on just those two trades puts you ahead $28,000. You’re now up 28% based on your original capital of $100,000, yet you’ve only been right on two out of 12 trades!

Another related and key element …

Rule #4. Focus on the present, not the past or the future. Great athletes know this. Basketball players don’t worry about the next basket that needs to be made, tennis players, the next serve or the next point.

They do, of course, prepare and train. But when they are playing their games — they focus on the present, refusing to let the past or the future cause them anxiety. Why? Because anxiety causes one to lose focus.

Last, but not least …

Rule #5. Have your favorite tools at your disposal. For an athlete, it’s his or her favorite shoes, tennis racket, set of golf clubs.

For a trader, it’s his or her favorite analyst, technical trading system or indicators.

We all have our set of necessary and favorite tools to do our jobs, no matter what we do. For investing and trading, it’s no different. You must find the tools that work for you. You must also keep your tools in good working order — updating and refurbishing them as necessary.

I spend a lot of time on my tool bag, which ranges from standard technical indicators like moving averages, oscillators, charting and the like, to most importantly, my detailed historical studies on short-term and long-term investment and trading cycles.

But bear in mind your tools do not need to be fancy or complex. Often times the best tools are the simplest!

Best wishes,

Larry

P.S. For more of my insights and analysis, all of my recommendations, and flash alerts consider a subscription to Real Wealth Report. At just $99 a year, it’s the best investment you’ll make. I guarantee it.

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rick
15 Nov 10, 12:34
U.S. Savings Bonds & TIPS: Viable Tools For Saving

It's unfortunate but the system has never been designed for the small investor in mind. Sadly, the small investor has been relegated to the point that the only viable option at his disposal is solely to control the steady erosion of the principal.

With that in mind, the best tools available on the market to accomplish this feat is through investing in U.S. Treasury inflation-protected securities such as Series I Savings Bonds and/or TIPS. Assuredly, the small investor can expect to lose money even by holding these securities, but at least one can slow the bleeding.


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6 Critical Money Making Rules