(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.)
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 keep 1/4 savings in short-term US Treasury TIPS. (STPZ, VTIP, etc.)
- 20% to 50% of each paycheck must go directly to a savings account. 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.
- Invest your savings. If you do not invest, you will lose half to inflation. Because, as everyone knows, the prices for most things will double about every 10 to 20 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 the value of 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 the top companies, you probably gain more than is lost by 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.
- Invest safely, per steps 4-7. Otherwise, you could lose half in a crash. Because “standard investment procedures” were terrible for millions of people in 2008–and these procedures have not changed much 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.
- Avoid “quasi-safe” investments. (Annuities, CD’s, corporate bonds, etc.) Because it is foolish to risk high amounts in exchange for low profits! Also because a small medium-risk investment can offer the same profit as a large low-risk investment–and both can lose -100%. Please suppose, for example, 1/2 your money is in the stock market and 1/2 is in US Treasury TIPS. After about 15 years, you can expect the total value of your account to double. This results in 100% of the original amount now being in the stock market and 100% in US Treasury TIPS. If there is then a 2008-level stock market crash–the worst that can happen is that you have 100% of the money with which you started. In contrast–suppose you put 100% of the money in corporate bonds. This means that for the rest of your life, 100% of your money is at-risk and never in a safe place. After 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 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. (See: “The Confiscation Scheme For US And UK Depositors,” by Ellen Brown, 2013.) Of course, hopefully this might never happen–but why take that risk? The federal government is legally 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.)
- Primarily use “index investing” with broad-based equity ETF mutual funds. 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 or sold instantly with only a $5 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 are these ETFs much better than individual stocks? Because the biggest question concerning safety is not whether an investment will go up to a high peak–but whether every peak will return after 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 generally be the most stable and the first to recover after a crash.
- Always maintain emergency Stop orders costing no more than $5 per trade. 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 much of their life savings and had to cancel their retirements. To our knowledge, Warren Buffett has not even 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 can be set anywhere between -5% to -15%. 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 investors with less than $500,000 per account should avoid paying more than $10 per trade, as available at TDAmeritrade.com–and investors with less than $250,000 per account 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 the per-Stop cost is $120 to buy-and-sell 3 equity ETFs and 3 TIPS ETFs. Whereas, if the per-trade fee is $1, then the per-Stop cost is only $12. For in-depth details see: Stocknectar.Org/diy.)
- Always keep 1/4 savings in short-term US Treasury TIPS. (STPZ, VTIP, etc.) Because during the next recession, you should have one investment that is extremely safe! 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 25% 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 use three or more different TIPS ETFs. (Or use a “TIPS ladder” as explained here: Best Hedge Investments: Gold, TIPS and Cash.)