Thriving in 2008 Markets

A commentary by Leland Hevner, President of the NAOI

My answer had two parts. First, the NAOI does not give specific investment advice to our students. Our mission is to provide the education, methods and resources that enable our students to make these decisions on their own. Second, students who graduate from the NAOI Confident Investing Series and who put into practice what they learn NEVER need to hunker down in a defensive position and simply try not to lose money. They are fully equipped to confidently go on offense and aim for double digit portfolio returns in any market condition, including the disastrous 2008.

I told the reporter that NAOI graduates are not like average investors who are too often confined to traditional, and increasingly irrelevant, approaches to investing that consist mainly of building a portfolio of generic stock and bond funds and then concentrating only on diversification and asset allocation to cope with changing market conditions. I explained to her that NAOI students had access to a far larger array of investing tools, methods and strategies that enabled them to transform any market challenge into an opportunity.

As an example of this more comprehensive form of investing used by NAOI students, I informed her that by using the very same techniques that I teach, my personal portfolio had returned 19% in 2008 without excessive risk or requiring a significant amount of my everyday attention. She was quite skeptical and asked for details. I gave her just a few examples of how I invested in 2008 to achieve double digit returns in a stock market that lost approximately 40% of its value. Below I share these examples with you.

Note that the following descriptions are simply very high-level examples of investing activities I engaged in during 2008. They are not recommendations and do not constitute investing advice of any type. My goal here is not to tell you how to invest but to illustrate the possibilities. 

1. I ignored financial "experts". I stopped using professional financial advisers in 1997. I found just too many conflicts between their goal of earning commissions and my goal of maximizing portfolio wealth and income. However, I have been told by my students and various NAOI members that during the crash of 2008 their advisers where almost universally recommending a "stay the course" posture. In other words, as the stock market ship was sinking people were being told not to sell their stocks and even continue to buy as prices went sharply down. This was preposterous advice, akin to tying yourself to the mast of a sinking ship. I also turned off the TV and was saved the frustration of listening to an endless flow of advice and recommendations from celebrity financial "experts" who claimed the right to change their minds almost weekly based on "new information", making them essentially never wrong. They remind me of politicians and merit the same level of trust. My first, and best, decision in 2008 was to think for myself rather than letting "experts" think for me.

2. I used ETFs as my primary investing vehicle. A well designed and diversified portfolio has a place for all types of investments including index mutual funds, actively managed mutual funds, stocks and options. But in extremely volatile markets such as we experienced in 2008, my investment of choice was the Exchange Traded Fund (ETF). These are essentially index mutual funds that trade like stocks. They gave me the diversity I needed for lower risk while at the same time giving me the flexibility I needed to monitor and trade them as easily as stocks. Among the ETFs I concentrated on in my portfolio in 2008 were the following: 

• SPY - An ETF that tracks the S&P 500 index. 
• GLD - An ETF that tracks the price of Gold bullion
• VNQ - An ETF that tracks the Real Estate market
• IYE - An ETF that tracks the Energy Sector.

Now you are probably saying to yourself that with these investments I must have really gotten hammered in 2008. If my plan was to simply buy and hold these ETFs then yes, my portfolio would have been decimated. But by using the same knowledge and resources that I provide to you in the NAOI Confident Investing Series I had plenty of opportunities to make money on these investments as explained below.

3. I traded my investments instead of buying and holding. I never buy an ETF for a volatile market or asset class without implementing, at the time of purchase, a plan for selling it. Web-based tools supplied by virtually all online brokers enabled me to define a trading plan for automatically selling any of my ETF purchases to either stop-losses or to take profits. Using a little bit of price chart analysis I determined price levels for stopping losses and for taking profits and then, at these prices, I set either automated sell orders or email alerts. My broker's system monitored my investments continuously and got me out of losing positions before my losses got too big and alerted me to prices at which I might want to consider taking profits. By moving in and out of SPY, GLD and IYE multiple times during the year I earned significant returns whereas a buy and hold strategy for these investments would have been disastrous. An amazing new tool for creating an effective trading plan is the "trailing stop" and all individual investors should understanding it and use it. Implementing trading plans is an art and a science that you will learn in the NAOI Confident Investing Series. 

4. I bet against specific markets. An effective trading plan can enable you to make money on investments that are going up, down or side-ways. But a potentially more profitable strategy for profiting in markets that are in a severe downtrend is to simply bet against the market. You do this by a trading activity called "shorting". A short investment increases in value when the underlying market, sector or asset class decreases in value. Shorting individual stocks is a very risky strategy that I don't recommend to anyone. But buying "short-ETFs" is no more difficult or risky than buying stocks. For example there exists an ETF with the symbol SH that goes up one dollar for each dollar the S&P 500 goes down. As such, SH is an ETF that "shorts" the stock market. During 2008 when I felt the market was on the verge of going down further, I sold SPY (which is "long" the market) and bought SH under the watchful eye of a trading plan as described just above. For the 12 months ending November 31, 2008, the SH investment earned a positive 27%! At various times during the year I switched between VNQ - my Real Estate "long" investment and SRS - a "short" Real Estate investment. l did the same for Energy, using IYE as my long investment and DDG as my short investment. Both the Real Estate and Energy markets during 2008 experienced sharp price increases and sharp declines. My use of both long and short ETFs for both markets in conjunction with a trading plan for each reaped impressive gains. For the Gold investment, GLD, I simply sold to take profits and to stop losses, again using an automated trading plan, and also achieved significant gains. The ability to go both long and short a specific market using easy to trade ETFs means you can make money in any market, sector or asset class regardless of its direction. You will learn how to "short" markets in the NAOI Confident Investing Series.

5. I used simple options trades. In my opinion options are one of the most misunderstood and underutilized investments available to individual investors. Far from being risky or complicated they can be the safest and simplest of all trading vehicles. During 2008 I used basic Put Options to protect gains in certain areas of my portfolio. I also used Covered Calls to generate a steady stream of interest income far above what could be expected from Certificates of Deposit, Money Market Accounts or even Bonds with little to no risk. You will learn how to do this in Course 5 of the NAOI Confident Investing Series.

6. I had a total portfolio plan. I certainly did not actively trade my entire portfolio. The Confident Investing Series shows you how to build a portfolio with four Segments, these being Core Funds, Focused Funds, Stocks and Options. Core Funds are the most conservative portion of the portfolio with the other three Segments having an incrementally higher risk/reward profile. Your investing goals, your tolerance for risk, your market outlook and your willingness to become involved in the investing process will determine how much of your total investing money to allocate to each Segment and thus the return for your entire portfolio. During 2008 I earned 19% on my entire portfolio while a large portion of it was sitting safely in cash! Again, you will learn how to build a portfolio that fits your unique investing profile and current market conditions in the NAOI Confident Investing Series.

Summary. These are just a few of the types of investing activities that worked for me in 2008 and enabled me to realize double digit returns on my portfolio during a horrific market crash.  There is no super-secret trading system here, no insider knowledge or complicated technical analysis. All of the above listed actions are simple, basic trading/investing actions that you can easily perform on your own. All of the Web resources I used were free of charge. To replicate this type of success what you need is the proper knowledge, methods and resources. These we give you in the NAOI Confident Investing Series.

As an aside, I never saw my input to the Fox Business News reporter's story in print. I suspect that it did not fit the hoped-for template of portraying individual investors as being helpless victims of a grossly unfair and corrupt market system with nowhere to turn. While Fox Business News is better than most, my opinion is that most financial reporters prefer stories of gloom and doom as opposed to stories of how individuals who take personal responsibility for the performance of their investments can excel. Perhaps negative stories sell papers, but then what do I know.

In 2008 You Could Have Thrived As Well

It is important for me to make clear that I am not a day-trader. I don't have a high tolerance for risk. And I don't have a lot of time to sit in front of a computer managing my investments. While I am not quite the "average investor", since I teach this stuff, I am pretty darn close. There is absolutely nothing that I did in my investing activities in 2008 that you could not have done yourself as an NAOI Certified Investor. There is no doubt in my mind that with the proper education you too could have thrived in 2008.

2008 was a wakeup call to individual investors of all types. Many of you did exactly what your advisors told you to do during the year. You diversified your portfolio. You decreased its risk profile incrementally as you moved one year closer to retirement. You didn't sell your stocks or funds as the market moved down. According to the "experts" you did everything right. And WHAM! you lost 30%, 40% and even more of your savings. Something is seriously wrong with this picture. You can't continue like this and you don't have to.

In the NAOI you have found the resource you need to finally take personal control of your portfolio. This does not mean you have to day-trade it or spend hours per day or per week in front of your computer monitoring it. This doesn't even mean that you need to immediately fire your advisor. It simply means that you must cut the cord of unquestioning dependency on third party sources. The first step toward assuming this personal responsibility is learning how investing works and the resources available for enabling you to translate this knowledge into practical actions. This is what the NAOI Individual Investor Certification Series provides to you. It, in essence, empowers you to start thinking for yourself and begin acting in your own self-interest.

If 2008 has either angered you or scared you sufficiently to motivate you to learn how to invest on your own, then it will not have been a total waste. Rather, you can view it as an expensive lesson, one that forced you to finally take charge of your future financial security. And this is probably the only way you will ever recover what you lost during this historic year.

Let's Get Started!

So, let's get started. I look forward to welcoming you as a member of an elite group of individuals who are fed up with being afraid of the markets, confused about what is happening to their portfolio and dependent on third party advice. As an NAOI member and program graduate you will be empowered to look at the world of personal investing with understanding, excitement and confidence, not with confusion, fear and frustration. And you will have the satisfaction of knowing that your future financial security, and that of your family, is under your personal control and not dependent on unpredictable markets and unforeseen world events.

You can thrive in the investing world of 2012. But you need to get started now.

Leland B. Hevner

President, National Association of Online Investors
Washington, D.C.
202-686-2556
LHevner@naoi.org

Leland Hevner, NAOI President