Sunday, July 04, 2010

The Road to Financial Independence

This post needs to be read along with the previous post, because they both support each other as to the direction of the stock market. Today's chart shows the Put to Call ratio for the years 2009 in red and for 2010 in Blue. 2010 has shifted up significantly in Puts, as the ratio has made a step function up. On April 14th of 2010, the Put to Call ratio hit a multi year low, signaling a sell to followers of this indicator. The market has been going lower after this low Put to Call ratio. I wrote about it that day and said it was a multi year low going all the way back to 2007. I said it could indicate the correction could begin. It turns out this was the the main indicator of a market which was about to correct. The Dow on April 14th closed at 11,018. On Friday the Dow closed at 9,686. That's a 1,332 point or a 12.1% drop.

We are in the process of a decline to eventually test the 6,400 lows and in doing so will fail to hold there. If this does occur, it will eliminate a whole generation of investors, as it eliminated many in the Great Depression. I will continue to warn readers of the bad times ahead. Reading this message on July 4th, Independence Day, may not be what you wanted, but becoming financially Independent, drives my writing. It is my wish for everyone to stay free and become financially independent. I am concerned that this Generation X, of all generations, is not equipped to survive a major financial crisis, which is certain to change many of their lives, as well as their parents' lives.

Just as if you faced the threat of a hurricane or earthquake, there are things you can do to prepare yourself with regards to financial planning . The old paradigms will not hold true going forward, at least not for a very long time. One paradigm will not work going forward. For example, "a Buy and Hold strategy is wise, as markets in the long term go up". And yet, many still have that philosophy and use that strategy. Unfortunately, they might become too old to benefit from this strategy. It will be many years before we recover from this expected drop. From about 1962 to 1980, the stock market stayed basically flat. The Dow was at about 1,000 then as you can see above.

The Federal, State and Local governments could do something to help the economy, if they really wanted to, but it would be short term pain to have long term gain. Politically it would be difficult, as many hate Wall Street and don't want any breaks given regarding investment losses. For example, they could change the IRS code affecting stock losses. They could allow an individual to write down losses from previous years against gains made within a given year, rather than the limit of $3,000/year, which is now in effect. This would help reduce taxes and provide more disposable income, which would help to stimulate the economy and help many survive. But I think it is time to change this law as many have not recovered from losses in 2008. There will be more to come on ideas like this in future articles. Feel free to add your suggestion here.

The Road to Financial Independence starts with small steps. The first step is becoming aware of what is going on around you, staying informed and noticing what seems to be changing. Take your head out of the sand and start testing what you hear in the media against what you are feeling and experiencing personally. Trust your gut, but then verify. Look at where your money goes and how steady is your stream of income. Consider what would happen with a 50%-70% haircut in your invested assets for an extended period of time from today's values. There is much to think about.

Start with this question. Do I manage my own investments or do I use a professional? Do I have a good track record with my current advisor? Do I trust my Financial Advisor? If there is any hesitation in answering these last 2 questions affirmatively, consider looking for another Financial Advisor immediately. But remember, you should be paying more attention to your investments than your Financial Advisor. It's your money you worked hard to save. Many of you are still working hard, 70-80 hours a week. You have got to find the time to spend a minimum of 2 hours a week on your investments. You can start learning by reading more books. Then you can ask your Financial Advisor better questions. A more informed client is all the better for a Financial Advisor, as they can help tailor your investments to your needs. Good luck and come back. And don't forget to read the previous post titled, "Stock Market Outlook: As it is above, so it is below."

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Blogger Vic Cebollero said...

Thank you kind sir for sharing your knowledge and talents with the world. You are truly appreciated.

I agree that the numbers simply don't support a positive outlook for the market. Let's hope that we will be able to overcome the greed and corruption that is robbing us blind and destroying all our founding fathers built.

Blessings to you for your courage and generosity ... Vic

10:08 AM  
Blogger Charles Amico said...

Vic, thanks for your kind words. I hope this knowledge helps you ensure you protect your assets. All the best.

6:15 PM  

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