AboutPaul Henneman Expertise I can answer any questions on investment strategies. Specifically, my expertise lies in long term investment strategies designed to beat market performance while reducing risk. Not get rich quick schemes, but solid investing strategies.
Experience
Past/Present clients CBSMarketWatch, Hoovers, Multex, Yahoo Finance, Zacks, Earthlink Finance, several large institutions and hedge funds, over 30,000 subscribers to www.ValuEngine.com
Question QUESTION: What would have been the best investment between December 2007 and March 2009?
ANSWER: Thank you for your question John.
I think that clearly the best investment during the past two years would have been to short the financial companies. This is essentially a way to take a position in a stock that allows you to profit if the stock goes down. Short positions in real estate or the US car makers would also have done stunningly well. For example, GM was trading at around $32 in the spring of 07, now it trades at just over $3. Shorting that stock would have seen a 10 fold increase in value for your investment. Citigroup traded at around $50 two years ago, it fell as low as a dollar a share recently. Shorting would have seen profits the entire way down.
Even a short position on an overall index, such as the S&P500 can be done through an Exchange Traded Fund (ETF). For example, ticker symbol SDS is a double short on the S&P500. By purchasing one ticker symbol, an investor could have shorted the S&P500 index. Even better, SDS is a leveraged position, by a factor of two. This means that if the S&P500 was down 10 percent, SDS would be up approximately 20%. The trading price of the shares during that period do not tell the whole story, as very large dividends were paid out to existing shareholders numerous times during the past two years.
In summary, anyone who bet against the market going up, and invested in either short positions or in ETF's that were focused on drops in the overall market did extremely well.
I hope that this helps. Please do not hesitate to follow up with me if I can be of any additional service.
Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com
---------- FOLLOW-UP ----------
QUESTION: That's a great answer, very detailed with lots of information. The only problem is it's looking back with knowledge of what happened. I want to know what normal everyday investment would have helped grow my 401k and help reduce the loss from stocks and stock funds. Thank you very much for your expert answers.
Answer Thank you for your follow.
I admit that I am confused by your follow up question. You had asked me what the best investment would have been from 2007 through 2009, and I gave my answer. Of course it is looking back at what happened. There is no way I can answer that question without doing that. It is not possible to know for certain what is going to happen in the future, but in early 2006 my research firm was warning as loudly as we could what was coming. Some of these articles and newsletter that we issued back then are available as samples for our investment newsletters on valuengine.com With the proper time and research on your investments, you can with at least some reliability head off disaster before it happens. Many of our subscribers did exactly what I outlined, or at least sold many of their more risky investments to put those funds into fixed income investments.
Market performance has been terrible. The ONLY investment that would have grown during the past two years is one that was short on the markets, not a typical long holding as I outlined. ETF's are certainly normal ever day holdings that any investor can purchase, including the ones that were short on the markets. I'm not sure what else I can add here, but in your follow up you give me the additional information that you are looking for investments that would help reduce the losses from stocks and stock funds in your 401k. This is a different type of question. 401k's are generally limited in what you can invest in, so this is difficult to comment on as I do not know what types of investments are available to you. But, in general, there is really no way you could have positioned your 401k investments to have had your 401k grow during the past two years. There just would not be the type of investments to make short bets I mentioned against a housing market that was too high. You could have however repositioned funds into fixed income and bond funds if you knew what was coming.
Perhaps if I may be so bold, the question you are really after is "what can you do with your 401k and retirement accounts to minimize the chances of further losses going forward"? Very different from asking what should have been done these past couple of years.
The only thing investors can do within a 401k is to make sure that your investments are diversified across different types of funds. Small cap versus large cap, international exposure, some bond funds if they are available. If you are a conservative investor, you should perhaps have a larger amount in bonds or money market, and less in stocks. if you are more aggressive, then more in stocks. Most would suggest not to have more than 60% of your portfolio in stocks or mutual funds, and the rest in more conservative investments. This would have reduced (but certainly not eliminated) losses in your retirement funds.
However, many investors make a huge mistake in that they ride the market all the way down, then move into more conservative investments and miss out on what can be a fast and strong recovery. Investing is not easy, professionals spend their entire career researching ways to try to predict what will happen and still get it wrong most of the time.
Another thing to consider is a whole life insurance policy. I know this sounds strange, but even if you do not want the insurance these types of investment grade insurance policies act as investments. They grow at a minimum rate, even in terrible times. For example, my whole life policy saw about a 6% gain over the past year. Not good during bull markets, but stunning considering what has happened to the overall markets. While the markets dropped 50%, my whole life funds grew by 6%. These policies build up a cash value over time, and that cash value can be accessed income tax free when you retire. If interested, the book "Missed Fortune" by Douglas Andrew (available on amazon.com) goes into these types of policies in depth. I do not agree with his strategy to take out the equity in a home through financing as much as possible and moving that into a life insurance policy, but the sections on life insurance and how this can serve as a much more stable retirement account, and in the long run generate more wealth. If you are concerned about your investments, I would suggest that this is essential reading, so you at least know what most people do not: life insurance is a powerful investment tool. It may or may not be for you, but there is no way of knowing unless you investigate.
Please do not hesitate to follow up with me if I continue to misinterpret your question, or simply would like more information on any of the above. Email is difficult to see exactly what you are asking, and the more specific, with the most details possible means that I can more fully get you information that is relevant.
Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com
