Money on my Mind

I've had the market on the mind for the last few weeks and have been reading like crazy about it.

While the stock market volatiles its way through the summer I've been sticking with my tried-and-true savings plan:

• Don't spend money on stuff I don't need
• Reduce costs further by minimizing unnecessary (and usually unhealthy) extras like ordering dinner in or eating lunch out at a restaurant
• Manage multiple savings accounts with separate, distinct goals
• Auto-withdrawls weekly (and separately) to each of the multiple savings accounts
• Maxxing out 401k match contributions
• Absolutely no revolving debt. Ever. Ever. Ever. There should be no excuse unless I'm buying a house. Not even for a car. If I can't pay for it in cash, I can live without it.

But as usual my savings plan is based upon one major thing:

• Stay the hell away from the stock market because a mess of historical proportions is coming. I don't know when (no one does) but the storm clouds keep brewing and I don't want to be in there when the proverbial crap hits the fan.

Yep, I've been reading a lot of Bill Bonner at The Daily Reckoning.

The problem here of course is I'm not diversified, at all. My savings plan is a modern-day version of stuffing it all under the mattress and hoping inflation doesn't eat it all next time I reach under the mattress to grab a pile of it.

But, how to diversify? I'm not gonna just buy some stocks for the sake of diversification when I just said I think they are doomed in the short-to-medium term.

Emerging Markets? Not now. About 8 months ago I was planning to buy a NIKKEI index fund and maybe some Brazil or South America Emerging Markets index ETFs but the unthinkable natural disaster happened in Japan before I could invest there. When I traveled to Japan in 2009 I was really struck by how organized, focused and driven the culture seemed to be, and Japan has had a slump in their stock market for 20+ years. They are bound to go up but sadly it's not the time to buy in yet. Once things settle down some more I definitely believe in the spirit and energy of the Japanese culture and I'm very keen to invest in their future. But not quite yet. Everything is connected to the US, so a crash here will be bad for everyone.

Gold? Well... yes, but not yet. I was considering it at $1500 but waited too long, then reconsidered and decided where I *would* buy it from at $1650... that was the Friday before the week of big losses on Wall Street that sent Gold up to record highs of  > $1900. As Gold hit $1700+, I said to my friend Matt, "Am I too late for the party?" If you have to ask, you probably are. So as Gold continued upwards at an alarming rate I decided it was too late to make a smart move before the crowds and I had better wait it out. Bill Bonner and the folks at The Daily Reckoning are backing up my concerns, saying that Gold has risen 33% this year alone and that's "not natural". Now that Gold has become fashionable to buy by Joe Investor is not the time to rush into it. So while Gold looked like a good long-term play at $1500, it's a bit crazy to jump in now that it's nearing $2000. So I'm gonna hold off, hope that some investors get scared and run from it, and buy in at a price that isn't inflated by recent fear-driven purchases. Then I'll hold it for 5-10 years as a good hedge against inflation and a sinking US dollar. So my Gold plan is set.

Another diversification method: Bonds? Nope. Not with inflation ready to soar. As inflation goes up, Bond yields go up and Bond prices (i.e. Bond values) go down. Simple. So, not the right time for bonds either.

I'm starting to run out of options. Did I mention, "keep it in Cash?" Oh yeah, that's what I'm doing already, with 100% of it. I'm looking for other options to diversify, if that's still possible...

Enter the Inverse ETF. I learned about these and they attempt (quite well, historically) to match the inverse of daily returns on an index, say the S&P 500. This is done via short-selling, and the fund then offers the average investor a slice at the shorting pie without having to deal in the sales yourself and without the typical crazy risks of short-selling like losing more than your original investment. Now I don't really believe in the stock market as a good place to grow money at the moment, but I asked myself, "What am I willing to bet on?" Betting on the stock market going down in the short-to-medium term is in fact something I've been spouting for ages. If I want to put some money where my mouth is, then buying an Inverse ETF is a way to do that. Note that there are some major risks still with these inverse ETFs, like the leveraged (2x and 3x) versions are even more dangerous as they multiply wins and losses. Great if you're on an upward swing, but terrible if you're not. And with the market like it is, you've got a 50/50 chance of one or the other every single day. These tend to be viewed as more day-trader style, and I definitely don't have the guts for handling that. An issue is that they aim to match the daily returns of the market, not the long-term returns. So these also suffer from "compounding" which also erodes your investment. So it's complicated, but I feel like the non-leveraged one is a good experiment. I'm willing to bet the market will go down over the next while, and this is a way to "diversify" just a little bit. I'm only putting a small single-digit percentage of my savings into this, so it's a relatively small amount. But it's a way to get at least some exposure to something other than cash, and if it's not a totally ridiculous amount then I won't be too worried if I win or lose a lot with it. At least I feel comfortable making this bet, and if I keep the amount relatively low then I won't freak out if it decreases somewhat.

I experimented with a day or two of day-trading earlier this week and lost a little bit and got a good lesson. I had purchased overnight and then hoped the opening price would be good. But I learned that Opening prices can be wildly different than what the day ends up being. The stock can still "go up" compared to the previous day's close, but if you buy at opening price, it can still fall a lot and "go up" over the day but you can still lose a few percentage points. Not great. Also I've been reading a lot and somewhat obsessing about the news lately and I had wanted to experiment to see if I could make a short-term trade and then just leave it alone for a bit and wait it out. The answer, by clear margin, is "most-certainly-absolutely-definitely NOT"! I checked my account maybe 20 times yesterday, opened up the stocks app on my iPhone about a bazillion times and even woke up in the middle of the night (and couldn't get back to sleep as I was wondering about it). Terrible. The answer is clearly "no", I can't handle the stress of this. But I'm glad I tried, and now I know :) This is a very clear indication that I'm not the kind of person who should try to time the market. If it works out well I'll be too excited and stay in too long and then miss the correct selling point. If I lose, I'll get nervous about losing too much and I'll bail out when the stock is low and I'll lock in my losses. So it's good to have learned these things about myself and I feel like the small percentage I lost is a good fee to teach myself a lesson and also to come to some agreements with myself about what my investing strategy should be in the future.

So if I'm not gonna make any short-term choices, then how about long term ones? Is there anything I can diversify in? Well, I'm going to invest in Gold, very likely. But not now. Bill Bonner suggests it could drop in half of its current values and since I have no money currently invested in it, it seems a silly time to buy now just to make myself feel good about diversifying. The only other choice I'm comfortable with now is getting one of the standard inverse ETF funds (non-leveraged) and riding that out for a while. I believe even the non-leveraged inverse funds suffer from that compounding issue but if it's non-leveraged it's not AS dangerous. And looking at the historical graph of the SH fund (ProShares Inverse S&P 500), it looks like it tracks the inverse of the S&P pretty well historically. So I'm considering this (still considering, it's been several months!) and I'll try to buy in on one of these swings upwards, maybe due to the Obama speech this week or the Bernanke speech in a few weeks. This feels like a negative play, like a vote of no-confidence almost, but it's not really. It's just saying that I think this is a certain Bear market and I don't want to be caught in regular stocks, but I'm a little antsy of being completely on the sidelines in cash only.

Whew. So that's what's been rattling around in my head lately. I figured writing it down would help me get this all off my mind!

Note: I'm not proposing that anyone specifically follow my plans here. Don't take my post here as a suggestion to you for your own portfolio. This is simply an explanation of my thoughts at the moment and I am certainly not a financial adviser. So feel free to read these as points to think on, but please don't make a financial decision based on anything you're reading here. These are just my thoughts, and I could just as easily be making a stupid decision in these markets as not. My real advice is this: be careful, and make sure you stay on top of the news as things are really crazy lately.