Over the next two minutes, I’m going to show you exactly how to survive the market’s next big downturn. I’ll share three simple techniques that will get you out virtually unscathed.
To fully understand the concept, though, you need to hear about one of the scariest days of my life.
[ad#Google Adsense 336×280-IA]It’s the only time in my life I was certain death was a real possibility.
In my head, the odds of survival were 50/50… and looking back, that was optimistic.
In hindsight, I was young and dumb. I pushed the limits and paid dearly for it.
It was August in Alaska, and I was piloting a small boat along the state’s rugged coast. I could see the storm ahead.
The water looked like it was boiling, with the tops of monstrous green waves getting blown apart by hurricane-force winds.
I should have turned around.
Instead, I plowed through it. Over one wave… through the next. Pure terror.
At one point, I wanted to quit. I wanted to give in to the storm and hide in the lee of a nearby island. But I’d gone too far. To turn the boat around and put the wind and waves at my back would have been certain death.
I was forced to go on.
Obviously, I made it. But it’s an event that reshaped my life. I think about it nearly every day.
I also think of the family that didn’t make it. Just five miles from me, an entire family was wiped out as they, too, pushed the limits. They wanted to get home from a day of hiking, but their floatplane was cut in half by the trees. This storm was fierce.
The lesson I learned that day was simple. The key to survival is to have a solid plan in place… and stick with it.
It’s no different in the stock market. Obtaining true liberty through wealth means understanding where you’re going and what you’ll do when big, scary things get in your way.
In Alaska, we had the perfect plan in place.
Early in the summer, we stashed dry firewood in several easy-to-reach places all around us. No matter where I was, I could have pulled the boat into a small bay and hiked less than a few miles to shelter. Combined with the two days’ worth of food on my boat, I could have waited out even the worst of storms.
I was stupid for not taking advantage of it.
For investors, it’s imperative we don’t make similar mistakes. We may not be so lucky. We may not get a second chance.
Fortunately, survival comes down to a simple three-step plan.
Best of all, it’s automatic. Do it right and you won’t have to make the choice to turn around or move forward. Your survival plan will make the choice for you – no questions asked.
The first part of your survival plan – as we’ve discussed before – is to have at least six months’ worth of your expenses stashed away in the form of liquid, easy-to-reach cash.
Hopefully – like the dry kindling we stashed in the Alaskan rainforest (yes, it’s a rainforest) – the money never has to be touched. But heaven forbid you need it… you’ll be glad it’s there.
The security of cash in the bank – or, better, in your home safe – is essential to the idea of liberty through wealth. It will have a profound effect on the way you invest and the way you live your life.
It’s an essential part of your financial survival kit.
The next tool is asset allocation. It reminds me of one of my favorite sayings. “If you don’t have a backup plan, you don’t have a plan.”
A good example of the idea in action is a trip I took across the mountains in a small plane. We were too heavy and too slow to fight a downdraft that was keeping us from climbing over a canyon wall.
Without a proper backup plan… we were in serious trouble. With the plan, though, we made a few simple corrections and were soon out of trouble.
It’s no different with your stocks. A solid asset allocation strategy is your backup plan.
Done well, you’ll have a portfolio that can withstand the toughest of storms. You’ll have some assets that will surge when times are good… some that will keep you afloat when times are tough… some that ying while others yang.
Remember, stocks are no different from the weather.
We can make our best guess at what will happen tomorrow, but trying to forecast what will happen two years from now… forget about it.
Your survival kit must be ready for anything. A strong asset allocation strategy will do it.
But, alas, sometimes even the best of backup plans fails. Maybe the weather is worse in another direction or the damn boat simply has a hole it in.
In those cases, it’s time to get your feet on dry ground… quickly. Any port in a storm.
That’s why every financial survival kit must employ one vital strategy – a solid exit strategy.
At The Oxford Club, our preferred bailout strategy is a simple, proven one. We recommend trailing stops. Designed to get you out of a stock when it falls by more than a preset percentage (we generally recommend 25%), trailing stops take the guesswork out of selling.
If I’d had a plan in place that would have told me enough was enough on that hellish day in Alaska, I could have avoided one of the most hair-raising events in my life.
That sort of stress is not something you need in your financial life. Avoid it by creating a simple financial survival kit.
Stash some cash… allocate your assets wisely… and set your exit strategy.
Do this and you’ll remain unscathed during the market’s next big storm.
Good investing,
Andrew
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Source: Investment U