What to do with your money now

First, the don't do:

1. Do not listen to the experts. I notched that when the market is up, the experts are busily recommending stocks. Right after the market tanks, financial advisors come out from the woodwork. And guess what they all say? Be in cash. If you listen to advisors, you will be buying high and selling low. That is a sure way to manage a small fortune to a subsistence.

Now what to do:

2, With the finger pointing and bellowing in Washington, you can be sure that the economy will stay in the dumps for a lot of years. The experts that tell you how well the index of stocks have done for the past 20 years are driving with a rear view mirror. The USA economy may get better, but it will still suck for years to come.

3. Be that as it may, there will be periods when the stock market will go up and periods when it will go down. With the advent of huge hedge funds and computer trading, those swings will be wilder than in 10 or 20 years ago. Instead of thinking of the swings as reasons to stay out of the market, you should use them to your benefit. But how?

4. Pick a company you really like and is presently undervalued. Some people look only at the price of the stock. Don't do that. Some companies issue billions of shares of stock, so that each share has a low numerical price. That doesn't mean it is cheap. The valuation of the company = Share Price X Number of shares

So that company can still be overvalued, because there are so many shares out there.

Conversely, a company like Apple, Google. Intel, NVidia are growth companies, and have a lot of cash in the bank. Yet the market still price them below the average, low growth, low cash reserve, stock.

5. Does it mean you should jump in and buy these stocks? Definitely NOT!!! As cheap as these stocks are, there will be times when the market wants to give them to you by dropping their valuation another 0% or more. It happened from Sept 2008, after Lehman went under. At first the drop was reasonable, given the catastrophic event. But after awhile, the price drops was ridiculous. Some income stocks were yielding 30% or more!!! Two years later, the markets recovered, and a person who bought it near the bottom would have realized 100% - 200% gains! It happened on 8/8/2011, after Standard and Poor downgraded US debt. A week later, the market recovered most of it's losses.

Believe me, the market is so psychotic, this will happen again and again for the next few years.

6. So what do you do? I recommend that you hang on to your cash and wait until the next show begins. Then gauge the severity of the bad news. If it is severe (like Lehman crash), then wait a little longer, until the skies start to clear. If the news is less severe, then the down cycle will be shorter.

Use 40% of you money, and Buy those stocks you

chose in Step 4. If the markets continue going down, buy more. But keep some cash around in case you have not called the bottom. If the market starts rising, before you have had a chance to buy more stocks with the remaining 60%, then oh well, don't fret it. You will still make more money than the experts.

I started with $500 in my pocket when I first moved to this country, and I have always lived by the mantra --- don't listen to the talking heads!!!

Investing during the Financial Crisis

The sky is falling! The sky is falling!! The sky is falling!!!

And indeed it is. As of today, the DOW has fallen 9 days straight. Most Americans' retirement accounts have been decimated by The Plunge. The typical events that cause a turnaround is nowhere in sight. The public has lost confidence in out elected officials to act responsibly. Nobody trusts President Bush when he says the markets will be OK. The Senate sat on the bailout plan for days until they got their $140B of earmarks. How brazen is that during an election year when both candidates denounce earmarks? A partisan Congress blames the other party for corporate greed, earmarks and All Things Bad, while providing no concrete proposals to prevent further abuses. The investment community has lost confidence in the Fed to make a difference. The bailout plan approved by Congress is skewed towards helping out the Guilty and the Greedy. AIG actually had the chutzpah to spend $400,00 of taxpayer money on a jaunt the day after the bailout was approved.

So what is an Investor to do?

Of course the safest thing to do now is to lock in your losses by bailing out of the market and parking your money in an FDIC insured bank account. But if parking your cash with no growth, and no yield is not your cup of poison, read on.

First of all, do NOT jump into other investments that are traditional considered The Safe Investments.

Annuities

Stay away from annuities. They are insurance policies that tie up your capital until the day you die. The insurance company takes your capital and invests it to generate return for issuing the insurance. Traditionally, that had been the safest way to park your money. Even though the rate of return is low, the perceived safety of insurance has been ingrained in our cerebral cortex since birth. Well, if there is anything the past 3 weeks have taught us, it is that insurance companies are not necessarily all that safe. Unless you have a level of crystal ball gazing that borders on the supernatural, you cannot tell which insurance company is going to be financially sound enough to pay out the annuties for the years you will be alive. And the use of Moody's credit ratings is of no use either -- Lehman was given an A rating right up to the moment they filed for bankruptcy.

So an annuity is a one sided transaction -- you give up control of your capital, while having no possibilty of pulling it out when thunderclouds loom in the horizon.


Canadian Energy Trusts

Not ALL sectors are affected by the financial crisis.

The best income play on crude oil prices is still to invest in select Canadian energy royalty trusts. Unlike U.S. energy royalty trusts, which stop paying once the trust runs out of oil….

Canadian energy trusts can acquire and add more reserves to replenish depleted supplies – and as a result, pay off perpetually.

Traditionally, these Canadian energy trusts have been exempt from corporate tax.

In November 2006, Canada announced its intent to tax these trusts starting 2011 – causing a 30% - 50% drop in the stock prices of those Trusts.

The good news is -- some of the trusts have accumulated enough tax pools that they will not have to pay corporate taxes even beyond 2011. So the stock price correction increased the yield for investors who bought after the November scare.

The recent financial crisis have caused a further drop in the stock prices of these Trusts. But let's look at the issue with eyes of cold steel. These Trusts generate Cash Flows independent of the US financial markets, and their dividends have not been impacted. So given the irrational panic selling over the past weeks, their stock prices have fallen to a level where the dividend yield is above 25%!!! No, that is not a misprint. How crazy is that? Some of these trusts have paid out twice as much in dividends over the years than their stock is worth today. And they continue to pay these Paul Bunyan sized dividends.

Regardless of how much more their stock prices fall, that dividend is as safe if not more safe than anything else in the market today. So unless you need to pull out all your cash over the next few years, these Trusts can give you an incredible amount of income.

Most of the better Trusts have hedged a portion of their production, and their income are not significantly impacted unless crude oil and natural gas falls significantly below todays levels respectively. In addition, the capital requirements of these Trusts are self funding in the short term. In the long term, these trusts need to borrow to grow. Canadian Banks do not have the liquidity problems of US Banks. They are better regulated. Besides, the Canadian Government is less leveraged than the US government, and is in a better position to do any kind of bailout, should it be necessary.

Bigger is better for these Trusts, as they have the flexibility to weather fluctuations in crude oil and natural gas prices. I like Penn West Energy Trust (PWE) . They are the biggest Energy Trust in North America with 10 years of reserve life. Their payout ratio only 52% making their dividend among the most sustainable in the group. Their income is hedged -- 40% of their production is hedged for $60/ barrel oil. Unless oil drops below $65 - $70, their dividend is safe. Even if it drops below that, a modest reduction in their dividend still represents extraordinary size yields.

The market is driven by Fear and Greed. At this point, Fear dominates. While we don't know where the market bottom is at, history proves there is always a bottom and an eventual recovery. By then the average investor's mindset will be consumed with "should have", and "could have". The more chaotic the environment, the more clear our thinking must be to survive and thrive. The better managed Canadian Energy Trusts like Penn West Energy Trust (PWE) and Paramount Energy Trust (PMGYF) are places to invest and grow while the storm rages around us.