How to Protect Your Investments in an Unstable National Economy

The U.S. economic downturn of 2008 caused investment losses for many, leaving everyone unsure about economic instability. You may wonder how you can keep your investments safe in an unstable national economy. Educating yourself, seeking unique opportunities, avoiding staying too liquid, employing defensive stocks, keeping selling separate from buying, and considering commodities are several ways to keep your investments safe.

Paper with Financials

Image via Flickr by Andreas Poike

Educate Yourself

Proper education is critical for both the investor’s comfort level and investment success. Just as the housing bubble contributed to the Great Recession of 2008, future bubbles could threaten your investments. Recognizing the characteristics of a bubble could help you get out of risky investments. While there is no one formula for determining whether an industry is in a bubble, businesses with small revenues with large market caps should cause concern. Understand that industry bubbles have large-scale impacts on the entire economy.

Understanding other economic indicators is helpful for proper investment selection. Fisher Investments supports investor education. Their YouTube videos about investing outlooks and education offer insight on ways to make the best financial decisions.

Seek Unique Investing Opportunities

Everyone knows that diversifying your investments is a great way to protect them from volatility. However, are you considering unique opportunities? Peer-to-peer lending is unique and can provide an additional investment strategy to keep you protected during an unstable economy. These loans are higher risk because they involve unsecured loans to individuals, but the lending platforms generally bundle loans to decrease the risk of failure. Depending on the loan you choose and your risk level, these can have attractive returns.

Invest for Your Timeline

Your response to economic instability should relate directly to where you are in your investment timeline. If you are close to retirement, you are investing conservatively to protect your assets. However, if you are early in your investing, economic instability should have less bearing on your longterm goals as the ups and downs will level out over time. Continue to exercise caution in an unstable economy but be comfortable taking risks as long as you are comfortable with losing that investment. In a long-term investing strategy, you have time to recuperate any losses from risky investments.

Avoid Staying Too Liquid

In an unstable economy, keeping cash on hand might be tempting. While it is good to keep some cash, too much cash prevents you from enjoying market returns. In an unstable economy, increase cash but do so modestly. This allows for a balance between having a safety net and benefitting from market growth.

Stacks of Money

Image via Flickr by vxla

Employ Defensive Stocks

Defensive stocks are from sectors that stay consistent despite the economy. Examples of sectors with defensive stocks include healthcare, food companies, utilities, and consumer staples. If another economic downturn occurs, these stocks continue to offer growth. The downside is that these lower risk stocks offer less lucrative returns. Use a diversity model consistent with your investing goals when adding defensive stocks.

Keep Selling Separate from Buying

While common practice tells you to always buy more stocks when you sell, this is not always the best move in an unstable economy. By sticking to the rule that you should only sell when you have something else you want to buy, you may miss opportunities to sell your stocks at their best price. Instead, when your stock hits its target price, sell. You will have other opportunities to buy stocks that align best with your investing goals.

Consider Commodities

Commodities are a possible option for keeping your investments protected. If an unstable economy begins to drive up inflation, people will still need to purchase commodities. A diverse portfolio with commodities allows you to capitalize on this. Because commodities present greater risk, buy according to your investment goals.

There is no foolproof plan for keeping your investments safe during an unstable economy. Incorporate these tips into your investments so that they align with your level of risk and comfort. These steps can lead you towards a better-protected portfolio. What are some other ways to protect your investments in a shaky economy?

Lending Club Returns Update 4Q13

Another quarter has come and gone, so it’s time for an update on the Lending Club returns I’ve been getting on my account.  At the end of the third quarter, my account was sitting at a return rate of 14.69%.  It’s actually improved a bit since then, but Lending Club has also added the ability to adjust the displayed NAR, which does some funny stuff (see below) and reduces the rate a bit.  I think that’s a good thing (again, see below) and that’s the rate I’ll likely be using for future updates.

Lending Club Adjusted NAR

A few months back, Lending Club introduced what they’re calling an adjusted NAR.  Basically, it uses the historical charge off rates of loans at the different stages of delinquency.  Obviously, the current loans have a historical rate of charge off of 0%.  Once they go into the Grace Period, about 23%, 16-30 days late, about 49%, 31-120 days late, about 72%, and in full default, about 86%.Beating Broke Lending Club Update

As an example, my portfolio currently has two notes that are in the 31-120 days late category.  So, when Lending Club is adjusting my NAR, they use the 72% figure and assume that 72% of the principle will be lost.  Using that number, they then calculate the new, adjusted NAR.  With the two notes late, my adjusted NAR is currently showing as 13.16%.  Still a very healthy number, and likely a more realistic number.  I like the new adjustment, as it should give investors a more realistic number to look at.

Lending Club Defaults and Late Notes

As I mentioned above, my portfolio currently has two notes that are 31-120 days delinquent.  And, if you go by the historical numbers, those two notes have about a 72% chance of eventually going into collections.  I’ve been lucky enough to only have had one note actually go that far to date, and the collection agency was able to get a bit of that money back for me.  It wasn’t the entire amount owed, but a significant portion of the principle, which I was happy for.  I could try and sell off the two delinquent notes, but at this point, I wouldn’t get much out of them, so I think I’ll just ride them out and see what happens.  The total principle involved is only about $35, so it would mean about a month and a half of lost interest payments.  That’s a risk I’m willing to take.

The Future of My Portfolio

With the rates I’m getting, I don’t foresee stopping my investing through Lending Club.  I may even start putting some more money into the account sometime in the future.  At the moment, I’m content to just leave it and reinvest the payments each month.  I’ve seen a few other investors that have either significantly changed how they’re using Lending Club, or have begun backing out of it altogether.  I think it’s something that you need to be able to change how you do it, but I also believe that backing out altogether is a mistake at this point.  The technology is still relatively new, and many of the changes that we’re seeing Lending Club make have been for the better.

I’ve created a page that consolidates all of the posts I’ve done on Lending Club, as well as the quarterly updates since I began doing them.  If you’re interested in starting to invest in Lending Club, you can read more on my Lending Club page, or you can sign up for an account and give it a go.

The Case for Buy and Hold Investing (#AAPL)

I’ve always been a proponent of the buy and hold method of investing.  If you’re unfamiliar with the concept, it’s basically the method of buying a stock (or bond, mutual fund, etc) and holding it forever.  Well, maybe not quite forever, but certainly for as long as you don’t need any liquidity.  For most, that’s pretty much right up until retirement.

I’ve been playing at investing for many years.  Over a decade.  To say that I’m successful would be stretching the truth just a bit.  I remain a buy and hold method advocate however.  Let me give you a couple of examples.

My investing history goes a bit further back than this example, but these are both examples from when I got a bit more serious about investing.  But, also a time when I was still very new to real investing and learning the world of investing the hard way; by trial and error.

Let’s start with what could be one of the strongest reasons why you should do your research, pick a stock, buy it, then hold on to it.

Buy and Hold AAPL

In October of  2000, I bought 3.95 shares of stock in a company you might be familiar with.  Apple Computers.  (AAPL)  For those 3.95 shares, I paid a grand total of $47.25 (including $5.98 in trading fees).  The stock had recently split, so the price was down.  As an IT professional (or at least a future one at the time), I was pretty familiar with Apple and thought well of the company.  I bought the stock with the idea that it was a company that I liked, and wasn’t likely to disappear.  That’s about the extent of the research I had done.  Back then, I invested with a company called BuyandHold (define irony, eh?)  but I mostly invest in stocks through Sharebuilder and Kapitall today.

Somewhere around April of 2001, I began thinking that I really should be buying stocks that paid a dividend if I wanted my portfolio to grow.  Note: I still believe that the majority of your portfolio should be giving you income in the form of passive income (e.g. dividends).  At the same time, the Apple stock that I had purchased not only didn’t pay any dividends, but it’s price per share really wasn’t going anywhere at all.

Of course, all of this was before the coming of the iPod, iPhone, and iPad.  Those didn’t come around until a few years later.  At the time, Apple was just a computer company that made some pretty cool machines, but not much else to speak of.  On May 1st, 2001, I sold my entire position in Apple for a grand total of $47.25 (after $2.99 in trading fees).  If you do the math (I have), I sold it for a profit… of $0.29.  Yep.  Not even thirty cents.

But, that’s not the lesson.  Here’s the real lesson.

In 2005, riding the success of the iPod, iPod Shuffle, and iPod Mini, and the iPod Nano, the stock of Apple began to rise. And then they released the iPhone in 2008.  And the iPad in 2010.  And their stock has never looked back.

The Buy and Hold Lesson:

If I had held on to those 3.95 shares of AAPL, and reinvested the dividends that Apple began paying in 2012 (bringing the total to 3.978 shares), they would be worth $2227.83.  The difference?  $2180.58.

It’s no small amount.  And a painful (to the wallet and ego) lesson.

Of course, hindsight is 20/20.  There was no way, back in 2001, that I could have possibly foreseen the successes that Apple would have nearly 5 years later.  But, if I had stuck to my buy and hold policy, and not worried about the details, I’d have a better looking portfolio now.

What about you?  What stock did you sell that you shouldn’t have?