How to Arm Yourself for the Next Market Downturn

Issue #2014

• WEALTHY: Will you be ready when the market tumbles? (Andrew Gordon)
• HEALTHY: 6 ways to add an essential mineral to your diet (Dr. Al Sears)
• WISE: Peter Lynch on making money in stocks

ALSO IN THIS ISSUE:

• Get invaluable insight into your company with 3 simple questions (Michael Masterson)
• Silence can be more powerful than words (Peter Fogel)
• It’s Fun to Know… about rock ‘n’ roll legends
• Add "halcyon" to your vocabulary

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The truth is importing high quality goods from Chinese manufacturers and selling them to consumers has never been easier.

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"The key to making money in stocks is not to get scared out of them."

Peter Lynch

How to Arm Yourself for the Next Market Downturn

By Andrew Gordon

The recent turbulence in the stock market has thrown a lot of investors off their game. And if you’re one of them, I bet you want to know why it’s happening. It takes hours out of your day to wade through all the newspapers and magazines, but it’s important to have a better understanding of what’s going on, right?

Forgive me for saying so, but you’re on a fool’s quest. I suspect it’s not the thirst for knowledge that’s driving you. You’re not even doing it out of concern for the safety of your savings. And if you really think you can figure out what’s going to happen tomorrow by understanding what happened yesterday, you’re a lot more optimistic than you should be.

What it really comes down to is this: The up-and-down swings of the market have thrown you out of your comfort range, and you want it back.

Admit it. We’re creatures of habit. We know what we like and we like what we know … even if what we know is a down market.

As perverse as it may seem, I really think we’d prefer the market to just make up its mind and head downhill. That way, at least we’d know what to do with our portfolios.

Yes, there’s already been a flight to quality, but not yet a mad or massive rush to bonds. Yes, bond prices were up immediately following that three percent drop in early March, but a movement toward bonds is to be expected in such circumstances. And bonds have since been trading up and down, depending on the news of the day. That doesn’t tell us much.

So, right about now, you have a choice.

You can continue agonizing over the state of the global and U.S. markets. I call that avoidance.

If you’re into Zen meditation, you can try contemplating the difference between post-recovery mild growth and a pre-recession mild slowdown. I call that a plain waste of time.

Or you can hunker down with your portfolio and take what’s happened during the past month and a half as a warning shot. Call it a test run for your portfolio because, regardless of what you think may happen tomorrow, you could be wrong. And unless your prediction is that the bottom is about to drop out of the market, your crystal ball could spell deep trouble for your portfolio.

In other words, you need to seek shelter against a storm before it hits.

Do me a favor and spend some serious time with your portfolio now. Experience is the best teacher, and you’ve been handed a benign version of market hell. Was your portfolio up to the challenge? Did any of your holdings go up? Which ones took a nosedive?

A market dropping about three percent is a mere ripple, a mini-correction. A proper correction is defined as at least a 10 percent drop. The next time the market falls, it could be a lot worse and your portfolio could take a much harder hit.

It’s possible that we’ve seen the worst of it - but I’m waiting for the other shoe to drop. And your portfolio should be ready if it does.

When the market corrects during broad upswings, it usually does it in two stages. The first downshift is usually followed by a second or "capitulation" downshift. We saw this pattern last May and June and in April 2005.

Now is the time for you to figure out exactly how correction-resistant your investments are. Here’s how I’d do it:

1. Divide your portfolio into its broadest categories - along the lines of stocks, bonds, commodities, and "special" investments (collectibles, jewelry, etc.). Determine how each category did during the recent mini-correction. That is, how much it lost from February 27th through the first few days of March, and how much it’s recovered since.

2. Break down your stocks further by risk factor. Blue chips, dividend-paying, and mid-to-large-cap value belong in the lowest-risk group. Growth, Canadian, west-European stocks, and small caps make up the next group. Emerging-country and central-European stocks go into the third group. And micro-caps, penny stocks, and IPOs constitute the riskiest group. I’d also separate out real estate by putting all REITs and other real-estate stocks into their own group.

Line up your bonds in this order: government bonds, munis, government agency bonds, corporate, and junk. If you have bond funds, see what their main holdings are and line them up accordingly.

Group your commodities (if you have any) by precious and non-precious metals, energy, grains, and other "soft" commodities like cotton, cocoa, or coffee. And put your collectibles to the side for now. (Believe me, they’re doing fine.)

3. At this point, you should have a good idea of just how far down the risk continuum your stock and bond holdings have been affected. For your commodities, simply get a general sense of how they did. For example, it’s worth noting that gold didn’t offer any protection. When the market slipped, the price of gold also went down, although it has since rallied.

4. Now you’re ready to make some changes. Return to step one and adjust your asset allocation by rewarding the broad categories that did well and cutting back on those that fared poorly. Then go through your individual holdings and do the same thing.

Assume the worst. Imagine that your portfolio is about to get hit not by gusty winds but by a cyclone. Do more hedging. Get more protection. Don’t give up on gold, but at least realize that gold might not be the protection you thought it would be. It needs help in the form of something like the PowerShare ETFs that short the market and the dollar. And for those stocks you choose to keep, enact a strategy of locking in returns earlier than usual.

When you’re done, your portfolio will undoubtedly have less upside potential. But it will also have much more resilience during a market downturn.

If the worst happens, you won’t escape unscathed. But you’ll do a lot better than 98 percent of other investors. And that’s all you can ask for.

[Ed. Note: Andrew Gordon, ETR's financial expert, is the editor of INCOME.  Each month, he uncovers income-generating stocks that promise safety (first and foremost), along with much higher-than-average profit potential.]

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3 Business-Building Questions to Ask Your Customers

By Michael Masterson

Every business should ask its customers the following three questions:

1. On a scale of 1 to 10, how would you rate your most recent experience with us?
2. On a scale of 1 to 10, how likely are you to do business with us again?
3. On a scale of 1 to 10, how strongly would you recommend us to a friend or colleague?

The first two questions were asked by Enterprise Rent-a-Car employees when, in the early 1990s, CEO Jack Taylor found out that customer complaints were up. He used the answers to bring his business back up to speed. The last question was suggested by Brian Tracy at ETR’s Info-Marketing Bootcamp this past fall.

I like the simplicity of three questions and a 1-to-10 scale. I suspect it would get you a very candid assessment of how good your product/service really is.

I would like to convince all my clients to implement something like this into their customer-service programs. You should try it for your own business.

[Ed. Note: Hear Brian Tracy's Bootcamp presentation in full with your very own Info-Marketing Library, the DVD recordings of the marketing and business-building experts featured at ETR's Info-Marketing Bootcamp.

And learn how you can be part of an exclusive group of 25 to 50 ambitious businesspeople that Michael will be leading through an elite 5-day program that can help you dramatically increase the profitability of your business here.]

Reload This Lost Fat Buster

By Al Sears, MD

The mineral magnesium is gaining a reputation as a simple and easy way to lower your insulin - exactly what you need to lose fat fast.

If you’re a regular ETR reader, you know that insulin signals your body to make and store fat. Magnesium plays a prime role in keeping both blood sugar and insulin in check.

It’s been estimated that our lean, muscular hunter ancestors got over 1,000 mg of magnesium from their native diet every day. On the average American diet, you’re getting less than 20 percent of that… if you’re lucky.

Restoring your magnesium levels to those of your caveman ancestors will take you a step closer to your real native diet - the kind you were designed to eat. It will also take you a step toward dropping fat and staying lean.

You can add magnesium to your diet by eating nuts, seeds, dairy products, and dark green, leafy vegetables.

*The recommended daily value for magnesium is 400 milligrams (mg)

[Ed. Note: Dr. Sears, a practicing physician and the author of The Doctor's Heart Cure, is a leading authority on longevity, physical fitness, and heart health.]

5 Reasons to Use the Power of the Pause in Public Speaking

By Peter "The Humorator" Fogel

As a stand-up comic, my goal has always been to get the biggest laughs in the shortest time possible. So I developed jokes and "bits" that have a very short set-up and go directly to the punch line. But when I became a speaker, I had a different goal. I realized that I needed to find a way to make my content have a more powerful effect on my audience. To accomplish that goal, I added pauses to my presentations. The results and feedback I got from my audiences were outstanding.

Here are five reasons why you should add "the Power of the Pause" to your public speaking:

1. When you pause, you create the illusion that right after you start speaking again your audience will be receiving new information.
2. When you pause, you are giving the impression that you are "in the moment." This makes your listeners feel that you are giving them fresh - not "canned" - content.
3. Using the pause keeps you from dumping a lot of heavy content on your captive audience, machine-gun style, all at once.
4. Pausing allows you to lead the audience where you want them to go. When you pause at a specific point in your speech, you are signaling them: "I’ve just thought about something important - perhaps you should too!"

Listen to the great orators and storytellers of our time - people like Garrison Keillor and Bill Clinton. They prove that sometimes it’s not what you say that carries the most weight… it’s what you DON’T say.

Try this in your own speeches and presentations and you’ll see how well it can work.

[Ed. Note: Peter Fogel is a copywriter/speaker/humorist and the creator of Peter "The Humorator" Fogel's Guide to Effective Public Speaking, an e-book/DVD/audio program.]

It’s Fun to Know: About Rock ‘n’ Roll Legends

When the Monkees went on their first concert tour, their opening act was Jimi Hendrix.

(Source: Who Knew? By David Hoffman)

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Word to the Wise: Halcyon

To the ancient Greeks, the "halcyon" (HAL-see-un) was a mythical bird. Legend had it that the bird would nest at sea during the winter solstice - and, while incubating its eggs, it would calm the waves. As an adjective, the word has come to mean tranquil/peaceful/carefree.

Example (as used by Elizabeth M. Norman in We Band of Angels): "It was a halcyon life, cocktails and bridge at sunset, white jackets and long gowns at dinner, good gin and Gershwin under the stars."

[Ed. Note: Become a more persuasive writer and speaker ... build your self-confidence and intellect ... increase your attractiveness to others ... just by spending 10 VERY enjoyable minutes a day with ETR's new Words to the Wise CD Library.]

Michael Masterson
Copyright ETR, LLC, 2007

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