The times they certainly are a-changin’.
This time last year the global economy was enjoying sustained and synchronized growth.
But in January 2019, market volatility has returned, growth has slowed, and the wheels are about to fall off the whole gosh-darned thing.
If you’re just joining us, this week we’ve been discussing the coming financial crisis and the steps you should take to protect your finances.
In yesterday’s edition of Money & Crisis, financial expert Jim Rickards recommended a strategy of “10% percent of your investable assets in gold or silver and another 30% in cash.”
This allocation will preserve your wealth and provide some dry powder for “bottom-fishing” when all stocks are cheap during a market crash.
Some of you folks may already know all about bottom fishing, its many benefits, and risks.
But if you plan to profit from the coming crisis, now is the time to get to grips with this commonly misunderstood investing technique.
Trawling for Profits
On its most basic level, bottom fishing is investing in assets which have recently experienced a decline and banking a nice profit when their market value (hopefully) recovers.
For example, you could buy your favorite tech company at market price and bank a 15% gain as it steadily climbs over time. Or you could wait until it experiences a decline.
An asset’s decline can be triggered by a number of factors: the release of an underwhelming quarterly report, loss of investor confidence, bad publicity, or even a full-blown financial crisis.
Regardless of the cause, if the stock recovers and maintains some sustained growth, you’ll have snagged it cheap, been able to buy more with your increased buying power, and you’ll get a larger percentage gain.
Warren Buffett has made millions with this strategy, buying undervalued stocks and waiting for their price to normalize.
Likewise, investors who bottom fished bargain assets during the 2008 crash made out like gangbusters when the market recovered. And if you’ve allocated your funds as Jim Rickards has recommended, you should be in an excellent position to do the same during the coming crisis.
Though it must be said, bottom fishing is still investing. And, as with all investments, there is an inherent risk involved. Sometimes a stock’s price will drop for good reason and may never recover.
Bottom fishing only pays off if the asset is genuinely undervalued. As comedian Steven Wright says, “There’s a fine line between fishing and standing on the shore like an idiot.”
Here are four quick strategies to help reel in the big ones:
- Draw up a watch list. Create and track a list of investments you would love to own. You’ll be notified immediately when one of these stocks goes “on sale.” This means you won’t miss out on price dips on your favorite stocks AND you don’t have to spend every day carefully monitoring the markets to spot those drops.
- Patience. Bottom fishing requires patience. While a stock you buy “on sale” might be destined for a spectacular recovery… it probably won’t happen overnight. It’s rare that an asset gets cut in half and rebounds in two weeks. Catching a bounce for a quick flip is different than bottom-fishing for bigger returns. Remember, bottom fishers look for that sustained growth after the asset normalizes.
- Fund your bottom fishing investments with dead weight. If you’re holding any stocks you’ve lost faith in, sell them off to raise the capital to buy your bottom fishers. If you sell these stocks at a loss, you can use these losses to offset taxes on your capital gains (up to $3,000).
- Don’t buy early or late. Prices can swing wildly during the first hour or last half hour of trading. Avoid trading at these times or you may end up committing to a much higher price than you intended. As a safety measure, always use a limit order to set the highest price at which you’ll buy.
And remember, investing is always a risk. Use your best judgment and exercise caution when using any investment strategy. There’s no such thing as a sure thing.
All the best,
Editor, Money & Crisis
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