May 25, 2006
By seadmin

As you prepare to ring in the New Year, I want you to seriously consider what equity positions you plan on carrying with you into 2006. I am somewhat guarded about what’s ahead for the New Year in the equity markets. I believe we are looking at about a 60% chance of a down market next year with a 40% chance the market will rise next year.

We have all heard Alan Greenspan’s warnings about the extremely painful adjustments. In fact, I touched on the issue of "extremely painful adjustments" last week and it generated dozens of inquiries as to how investors can prepare their finances. I would like to provide some details as to the reasons why Greenspan is so concerned and the potential outcomes.

Greenspan has taken the opportunity at select public speaking opportunities to express his concerns over the future of our economy if both the massive trade and budget deficits do not stage a dramatic course of reversal and runaway spending is not reined in.

The budget deficit for this year is running at $318 billion. Last year’s deficit ran up to a record high of $413 billion. Meanwhile, the national debt will hit $8.2 trillion before you receive this letter. That’s about $27,000 for every man, woman and child living in this country.

The trade deficit is the amount of money we spend when we buy goods from overseas that what we sell to other countries. The trade deficit grew by a margin of 4.4% just last month alone. That’s a really scary number considering that before we all bought TV’s from China, Greenspan was already warning about the problems that lie ahead if we don’t slow down our spending overseas.

Okay, so we all hear this intellectual banter on the evening news about the budget deficit and the trade deficit and how it’s not good. The big question for most everyone is, So, how does any of this mean anything to me? Does it really matter?" The short answer is: it matters a lot.

When Greenspan refers to "extremely painful adjustments," what exactly does that imply?

Well, it could imply the following:

1) If foreign countries become oversaturated in American debt, the dollar could drop in value. Not a good thing for those invested in U.S. markets.

2) Interest rates could rise dramatically in the attempt to keep foreign investors interested in our debt.

3) Home values could drop and foreclosures could see a drastic increase as the U.S. seeks to keep foreigners interested in our paper by raising rates.

4) A recession would be a likely outcome as interest rates rise.

5) A bear market is the inevitable fallout.


So we arrive at the most significant aspect of this discussion. How can you prepare your investments for the "extremely painful adjustments" that will take the shape of a weaker economy and all of the fallout that comes with it? Specifically, how can you protect your investments against a bear market loss, a loss that averages 35% of an entire portfolio’s value?

The answer is elementary, yet crucial. You have to be proactive and you have to have a plan. In fact, before you ever buy a stock, mutual fund or ETF, the plan for your exit strategy has to be firmly in place. A simple way to avoid a catastrophic loss is to set a 10% stop loss from your purchase price. As the price of the equity rises, you can set a trailing stop loss in order to protect gains. And you have to proactively monitor your investments to make certain they are continuing to fit your overall profit objective. This is how I recommend my Successful Investing subscribers manage their money and it is also the direction we take with every Fabian Financial managed client. In fact, we call this strategy the Fabian Safety Net.

We have no idea when Alan Greenspan’s prediction of "extremely painful adjustments" will come to fruition. It could be in three months, or it could be in three years, but we do know that he is always right and we are in for some rough sailing in the future. That is why we need to make the most of the current market environment which continues to be robust. We also need to know, in no uncertain terms, we will exit this market when the waters become rough.

You simply cannot grow your assets if you are left exposed to bear market risk. If you fail to develop the appropriate plan that prepares you for a well-timed exit from your positions when the market erodes and these "extremely painful adjustments" occur, you simply should not participate in the equity investing. The stakes are just too high for the ill-prepared.

Some people just don’t have the time or the inclination to proactively monitor their investments, but they still want to benefit from equity investing. And they especially want to grow their portfolios while protecting them against bear market losses. I recommend such individuals speak with Ed Foster, President of Fabian Financial, or with me about how Fabian Financial can assist you with the daily proactive management of your nest egg. You can reach Ed and me toll-free at (866) 432-2426.

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