All the essentials are right here on this page. Last major revision: June 2015
(Stocknectar.Org receives no approval nor payment from any suggested brokerage or ETF. However, this is only general information, not financial advice. Please modify any suggestions according to your personal situation. If you do not fully understand this information, please seek professional advice.)
A. Stocknectar’s Seven Steps For Financial Survival.
- 20% to 50% of each paycheck must go directly to a savings account.
- Invest your savings. If you do not invest, you will lose half to inflation.
- Invest safely, per steps 4-7. Otherwise, you could lose half in a crash.
- Avoid “quasi-safe” investments. (Annuities, CD’s, corporate bonds, etc.)
- Primarily use “index investing” with broad-based equity ETF mutual funds.
- Always maintain emergency Stop orders costing no more than $5 per trade.
- Always maintain two hedges: 20% PHDG, 20% short-term US Treasury TIPS.
B. Explanations for Stocknectar’s Seven Steps.
- Why should you save money systematically? Because “budgets don’t work”! To become financially secure, you must always immediately transfer 20% or 30% or ideally 50% of every paycheck into a savings or investment account. This means that you must find ways to cut down severely on the following “killer expenses”: housing, transportation and extra children. The chart at the right shows how you can actually become rich–or take better care of your children–if you can live on half of your salary for the next ten years.
- Why should you invest? Because, as everyone knows, the prices for most things will double about every 10 or 15 years! Therefore–if you do not invest, the “buying power” of your savings will be cut in half. Therefore–if you do not invest, half your savings will be lost. On the other hand–if you do invest, then your savings is likely to increase after ten years. What is an investment? In general, an investment is part ownership of the companies that profit from selling the goods and services that you buy. Therefore–by partly owning these companies, you are partly protected from price increases. The chart at the right shows that if you invest 50% of your salary for ten years, then afterwards you can spend 75% of your salary and still be saving more and more. Whereas if you spend all your salary all the time, then with each emergency situation, you certainly must end up with less and less.
- Why should you consider extra safety precautions? Because “standard investment procedures” were terrible for millions of people in 2008–and these procedures have not changed substantially since 2008! Consider the source. In general, “standard investment procedures” originate from super-rich, white-haired gurus who made money by risking other people’s money during a past century. Therefore, it is vital for you, a thinking individual, to consider the extra safety precautions of steps 4 to 7 below.
- Why should you avoid “quasi-safe” investments? Because it is foolish to take any risk in exchange for a gain that is only slightly higher than US Treasury TIPS! And because a small medium-risk investment can offer the same profit as a large low-risk investment. And because both can lose -100%. And once your money is lost, it does not matter whether the investment was supposedly “low-risk.” Such as annuities, so-called FDIC-insured CD’s, corporate bonds, municipal bonds, Covered Calls, Short Puts, etc. These investments made some sense before 2008. Some of these investments did well in 2008. However, all could have collapsed in 2008 if not for the presidential bailouts. Does it make sense for your life savings to depend on presidential bailouts? In the next 2008-level recession, any so-called low-risk corporate or municipal bond can suddenly become high-risk. CD’s are more safe than corporate or municipal bonds–but CD’s do not offer significant gains–and CD’s are not nearly as safe as US Treasury TIPS. If there is a financial crisis, the “fine print” in so-called FDIC insurance allows the FDIC to pay off your CD’s with the worthless stocks of your bankrupt bank. Of course, hopefully this might never happen–but why take that risk? You can instead buy TIPS or short-term TIPS ETFs. The federal government is required to pay for TIPS. In addition, because the federal government is not required to pay for FDIC insurance, then it probably will be able to pay for TIPS. Covered Calls and Short Puts are other traditional methods which supposedly can add safety or value to stock market investments. However, in addition to requiring your constant attention, Calls or Puts will reduce your choices of primary investment–thereby not necessarily adding safety or value. Most importantly, Calls or Puts also reduce the feasibility of Stop orders–a genuine safety measure. In conclusion: for most investors, any large “quasi-safe” investments should be eliminated. Simply replace them with a small amount of medium-risk investing combined with large amounts of US Treasury TIPS. (Either using a “TIPS ladder” or short-term TIPS ETFs–as explained below.)
- Why should you use “index investing” and broad-based ETFs? Because unless you are a multi-millionaire, ETFs provide the only way for you to diversify properly! An ETF is a mutual fund that usually holds an entire index of different stocks. In addition, an ETF can be bought and sold instantly with a single trading fee. Good examples are SPY (holds the S&P 500), GURU (copy-cats successful investors) and XRT (holds the S&P Retail Index). Why should you avoid individual stocks? Because the biggest question concerning safety is not whether an investment will go up to a new peak–but whether its old peak will return every time it goes down. With individual stocks, this is never certain. Because it is never certain whether, someday, Blackberry may permanently be overshadowed by a new invention from Apple. Or Apple may permanently be overshadowed by a new invention from Nokia. Etc. There is also the risk of sudden collapse created by a scandal or a change in market conditions–as has happened or almost happened with Enron, GM, Lehman Brothers, AIG, Goldman Sachs, etc., etc. If a permanent collapse can happen to these corporate giants, then a permanent loss can happen with any investment in any individual corporation. Therefore, any time that you buy an individual stock, you are buying something that might permanently lose value. Whereas, if you buy an ETF that buys an entire index of stocks–then you never risk a large amount in any single company. In addition, an index ETF will automatically stop investing in failing companies. In addition, “index investing” is usually more profitable than “value investing” or any form of “stock picking.” In addition, ETFs enable you to sell everything instantly and inexpensively with a few Stop orders. Similarly, avoid highly specialized or non-US ETFs. In the long term, no country or sector can do well unless the general US economy is doing well. Therefore, in good times and bad, index ETFs that are both broad-based and US-based might not be the most profitable investments–but will nonetheless generally be the most stable and the most likely to recover after a crash.
- Why should you use Stop orders and ultra-low-fee online brokers? Because the most sure-fire safety measure for your car is to stop the car–and likewise for investing is to stop investing! Many investment gurus, such as Warren Buffett, advise that you should never stop investing. However, please consider this. Firstly, Warren Buffett lost millions of dollars in 2008. This was not serious for a billionaire like him. However, thousands of ordinary people lost most of their life savings and had to cancel their retirements. To my knowledge, Warren Buffett has not apologized for this. Secondly, Warren Buffett did most of his investing in an era when Stop orders typically required selling-and-rebuying something like 50 stocks with total trading fees costing over $1,000. Under those conditions, Warren Buffett was correct in advising never to sell investments. Today however, with ETF investing and $1 to $5 per-trade fees, the total cost per stop can be only $10. With trading costs this low, there is no longer any mathematical argument against Trailing Stop orders which are set anywhere between -8% to -20%. In addition, the Chinese economy is relatively unstable and yet now influences the stock market just as much as the USA economy. In addition, high-speed trading now causes high-speed crashes. In other words: beware of the antique advice of antique gurus. Some investment writings imply that to stop investing during downturns will magically eliminate wins without eliminating any losses–while others will imply the exact opposite. Both opinions defy common sense as well as simulation studies. Stop orders are not certain to protect you from a financial crash–just as brakes are not certain to protect you from a car crash. Also, the use of Stop orders will tend to reduce average investment gains–just as the use of brakes will tend to reduce the average speed of a car. Similarly however, the use of Stop orders is an investor’s most powerful safety precaution. The only caveat is that accounts with less than $1,000,000 should avoid paying more than $10 per trade, as available at TDAmeritrade.com–and accounts with less than $500,000 should avoid paying more than $5 per trade, as available at OptionsHouse.com–and accounts with less than $100,000 should avoid paying more than $1 per trade, as available at InteractiveBrokers.com. (Please note that for true safety, every time an ETF is sold, you should place some of the money temporarily in a gold or TIPS ETF. Therefore, if the per-trade fee is $10, then each Stop incident can cost $120 to buy-and-sell 3 equity ETFs and 3 TIPS ETFs. Whereas, if the per-trade fee is $1, then the total per-Stop cost is only $12. For in-depth details see: Stocknectar.Org/diy.)
- Always maintain two hedges: 20% PHDG and 20% short-term US Treasury TIPS. Because during the next recession, you should have one investment that might profit and another investment that is extremely safe! PHDG is a “hedging ETF” which often gains value whenever most equities are losing value. Equally important–unlike most hedge investments–PHDG has seldom had substantial losses. I caution against investing more than 25% of savings in PHDG because PHDG is not a maximum-security investment. Short-term TIPS, on the other hand, are a maximum-security investment. Short-term TIPS seldom gain or lose more than 2% annually. TIPS are also “inflation protected” and also “backed by the full faith and credit of the US government.” Therefore, short-term TIPS are much safer than so-called FDIC-insured CD’s. Therefore, everyone should hold at least 20% of savings in short-term TIPS. The most fearful investors might want to increase the TIPS to 50% of savings. You can own short-term TIPS simply by investing in any of the following ETFs in any brokerage account: VTIP, TDTT, STPZ, STIP, SIPE. However, please note that a TIPS ETF can hold 1/5 of its assets in cash. Therefore, a large TIPS investment should be divided among three or more different TIPS ETFs.
Other hedge investments. Please note that long-term TIPS ETFs are not suggested here because they can lose substantial trading value. However, there are several alternatives to short-term TIPS ETFs. You can gradually build up a “TIPS ladder” by buying some individually-bought 10-year TIPS each year. Also sell one “rung” with the highest trading value or hold to maturity if the value of every rung is low. Then there will be no losses so long as you are able to hold to maturity. This also will maximize the hedging potential and minimize US tax rates. There are no trading fees for individual TIPS. I suggest TD Ameritrade as a good broker for maintaining a TIPS ladder with a user-friendly interface and telephone support. (I do not suggest TD Ameritrade for ETF trading for non-millionaires because of its fees of $10 per ETF trade.) Another alternative is to invest in physical gold ETFs. However, the price of gold is unstable. Therefore I suggest to purchase only 30% of account value in gold, divided between several ETFs, and only temporarily during stock market downturns. Finally, it is also feasible to hold a combination of paper dollars and close-to-spot gold coins in safety deposit boxes. The dollars will cushion against a loss in value for gold and the gold will cushion against a loss in value for dollars. In some ways, this is more secure than holding gold or cash via online trading. However, it is not feasible to insure the contents of a safety deposit box, and which can be lost through theft or natural disaster. Also, to avoid high US “collectibles” taxes, gold coins should temporarily be sold to a friend for two months each year, while thus declaring “ordinary” tax rates for gains or losses. The “sale” can be done on paper, never removing any gold from its safety deposit box. However, any such gold should be divided between several locations–and either held in a state with no sales tax or qualify as untaxed interstate commerce. In conclusion, there are several good alternatives for a maximum-security cash-like position. It is a good idea eventually to diversify between all of these alternatives. However, this takes time. Meanwhile, any investor can instantly enhance security simply by investing in short-term TIPS ETFs.
Caution: silver is not a hedge but is an anti-hedge. A “hedge” loses less often than usual–an “anti-hedge” loses more often than usual. Silver lost more than stocks during 2008 and lost more than gold during 2013. So, if someone says that silver is a hedge–please ask, what is it hedging? In fact, silver will negate the ability of stocks to hedge against gold and also negate the ability of gold to hedge against stocks. Of course, silver often can be profitable–but so can many other investments–and which do not have special storage and tax problems. In addition, gold coins are just as easy to buy as silver coins, less bulky to store, easier to authenticate and therefore easier to sell. It is simply absurd to buy silver coins when you can buy gold coins! Of course, silver is more certain than any stock to rebound after losses “someday.” If you are a multi-millionaire or a savvy trader in Futures or Options, then short-term exploits on SLV might make sense. Otherwise however, there is nothing more foolish than silver for most investors. The same goes for silver mining and for gold mining. Contrary to many popular books and articles, gold mining is not a second-best replacement for physical gold–nor a third-best nor a fourth-best. On the contrary–gold mining is like “anti-gold” because its losses will cancel-out the most important gains of gold during a stock market crash. In summary: gold mining, silver mining and physical silver all have no hedging ability. In addition, they all will sabotage the benefits of any hedge that you hold. Anyone who says otherwise has not bothered to check the obvious facts. (See the performance history graph at the right.)
Be aware that there are two arguments for gold–“get rich” and “be safe”–but only one argument for silver. Many writers will attempt to inspire gold fever by saying, “look how much gold has gone up!” They then tack-on the argument that “silver has gone up even more–so buy silver, too!” However, please be clear that gold has an additional “safety” argument that gold mining and silver do not. The only argument for buying silver is that “it recently went up a lot”–and that is never a good argument for buying anything.
C. Investment resources provided by Stocknectar.Org.
- SNT Free Investing Tips Newsletter.
- Stocknectar.Org’s Best Long-Short ETF strategies.
- SN-SOS High Security ETF Autotrading.
- SNHR Stocknectar Hedge Fund Reviews.
- We also encourage successful investors to donate 0.1% annually to environmental charities.
D. Offsite articles by Stocknectar staff.