Stress Test

Please note, I am not giving investment advice. This is only based on my personal experience. Investing in anything is a risky venture and you can lose money, please do your own due diligence before investing in anything.

Holy crap! After eeking out modest gains in 2007 (the Dow up 6%, the S&P 500 up 4.5%, Nasdaq up 9%), the market has completely cratered in 2008.

Just this past week the Dow dropped 500 (the Dow is now off 14.5% from it's all time hit hit in October). The Nasdaq shed more than 4% of its value (the Nasdaq is now 18.2% off it's 52 week high, dangerously close to being labeled a Bear Market).

All of the 2007 market gains were wiped out in the first 5 trading days of 2008. Right now all the indexes are within 1% of breaking through their 52 week lows. In my opinion, all the momentum on the market is down. I'm also convinced that despite all the bad news that's come out over the past 6 months, we are just getting started.

So - How are your investments doing? Chances are you just got your year end statement and it looked pretty good. However, how is it doing now?

The first thing you need to do is compare how your overall portfolio is doing versus the market. Just look at the total value of your accounts and compare that to what the value of the account was on your last statement. Quick and easy. If your portfolio is down more than the market is down, you need to do a deeper analysis.

The deeper analysis comes by checking each of your individual investments (stocks, mutual funds, etc.) and see how they have done since the beginning of the year. This is going to allow you to see the weakest portions of your portfolio. For instance, if you have more than 20% of your money in technology, chances are your overall portfolio is underperforming the market. You need to reduce the weakest positions fast! Don't wait and hope it will come back. We are in a declining market and your losses are only going to be magnified going forward.

I encourage you to go online ASAP and check your investments and see how they have done since your December 31st statement was printed.

In this kind of market, you want something that will hold it's value, or even go up, when the market sucks like this.

Ever since the first market shock that occured last February, I've been adjusting my holdings and getting into investments that do well in a bear market.

The huge declines we've seen the market since the New Year started have barely affected my portfolio. My qualified portfolio (which is more aggressive) has only declined about 1% in 2008. My after tax portfolio has actually gone up abut 3% since the new year started.

So, how did I accomplish this? Well first of all, I stayed far away from real estate, technology and financial stocks - I was pretty sure that all of these sectors were toxic waste. The sectors that I favored were energy and industrial materials stocks (both are plays on commodities - which did really well last year). However, I only had about 20% of my money in stocks, 10% in domestic and 10% in foreign stocks. I also put some money into gold and silver (again with commodities). I was in investments that would benefit from a weaker dollar like foreign currencies and foreign sovereign bond funds. Finally, I decided to hedge 10% of my portfolio in BEARX, a bear market fund. Bear market funds go up when the market goes down. Let me tell you, when the market is going down like this, a bear market fund is your best friend and it helps offset other losses in your portfolio.

I have passed the stress test with flying colors with this portfolio. However, things are always in flux and I'm always considering changes depending on what's happening. Energy is a tough call right now, there is a real possiblity this commodity could crash if market sentiment says a recession is at hand. Likewise, I've been thinking about increasing my BEARX exposure to 20% of my portfolio.

Look at where the economy is going and invest accordingly.