10 Steps to Protect Yourself From the Next Financial Disaster

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I was burned out from exhaustion, buried in the hail
Poisoned in the bushes and blown out on the trail
Hunted like a crocodile ravaged in the corn
"Come in" she said
"I'll l give you shelter from the storm."


-- Bob Dylan, "Shelter From the Storm"

Earthquakes, hurricanes, tornadoes, floods -- depending on where you live, you've probably made at least a few preparations against the chance that you'll face one or another of these natural disasters. But what about a financial disaster?

"Most people don't think about the uncertainty brewing around the world right now," says Alan Haft, a financial planner and money manager with Kelly-Haft Financial. But the questions in play are serious.

Among the major concerns: the world economy may be in a bubble; China may be slowing down and headed for a hard landing; and it's tough to gauge how stable the U.S. economic recovery is. Bad news on any of those fronts -- among others -- could quickly lead to another global economic crisis. In order to shelter yourself from a potential financial storm, Haft advises his clients to run through this checklist.

1. Should I Be in Stocks?

In addressing this, the most important factor is how much time you have until you need your money.

If your answer is something to the effect of "within a few years," then regardless of what's happening around the world now, the answer is "no, you shouldn't have as much exposure to stocks." You should have a high concentration in more defensive things, such as cash and/or short term bonds.

Haft recommends using the Rule of 100 as a guideline (or the Rule of 120, as we're living longer these days): Subtract your age from whichever number you please, and the answer is the ballpark percentage of your portfolio that should be invested in a diversified mix of stocks.

2. Quality Is King

You should also ask yourself about the kind of stocks in your portfolio.

If you're invested in Johnny's Lemonade Stand Co., launched by "Skinny Johnny" across the street last Friday, you have a far worse chance of weathering a storm than you do if you're invested in a blue chip that's been around for a hundred years, and has deep pockets to dig into in case of trouble.

If a Category 4 hurricane were heading your way, would you bolt the shutters with bobby pins or steel rivets? The answer is obvious and when it comes to stocks, your answer should be the same. In this day and age, quality reigns supreme.

3. Cash Rules

There is a famous saying in financial planning circles: Cash flow cures many ills.

Imagine this: Your stocks get pummeled by Hurricane Deficit, but while you're holding on waiting for prices to recover, they pay you cash along the way.

Sound good? It does to me. That's why I like high-quality stocks that send me dividends. This way, even during rough times, they can pay for a couple of lunches while I'm waiting for their values to come back.

4. National or Multinational?

Speaking of lunch: Would you like fries with that? McDonald's (MCD) makes around half its money overseas, so depending on the epicenter of the next financial disaster, it and similar multinational stocks might take an outsized beating.

Especially during uncertain times, knowing where your companies generate their revenue is essential. After all, however unlikely it is, should Europe's economy implode, you don't want to find out after the fact your favorite company makes most of its money selling to the French.

5. Embrace What Goes on Sale

Imagine this: Best Buy (BBY) is on the ropes, and the CEO blurts out, "Big screen TVs on sale for a hundred bucks!"

Would you head to the store? Of course you would. And that's why if all hell breaks loose, the markets just might be blurting out the same. Apple (AAPL) at $350? Bring it on.

At the moment, the market tide is high, lifting all boats. If that changes, you'll likely find some great bargains flopping around on the sand after the tide goes out.

6. Do Bonds Look Good?

Feeling good about those bonds you're in? Great. If the Iran vs. Israel conflict heats up, there's a decent chance they won't suffer as much damage as your stocks will. But be aware of how long your bonds are: It's more important than you might think.

Rule of thumb: The longer it is until a bond reaches maturity, the more likely it will lose value if interest rates spike. Conversely, the shorter the bond, the less you should suffer.

7. Credit Counts

Whether you're invested in individual bond or a bond fund, you need to know its credit quality.

Maybe you're holding a bond that's throwing off 8 percent. Fantastic. Good stuff. Well done. But why is it throwing off that much? Chances are the credit quality of that bond isn't all that great. Can anyone say "Johnny's Lemonade Stand?"

Remember Warren Buffet's famous line: "Only when the tide goes out do you discover who's been swimming naked."

8. Hedge It

Not sure which way the financial winds are blowing? Take heart: Few people are, and those who say they can tell you for sure typically don't know what they're talking about. That's why smart guys often hedge their bets with smaller stakes in such bad-weather friends as gold or inverse exchange-traded funds, and set up stop-loss orders to limit their damage when the bottom falls out.

Those might not be bad ideas for you too, so be sure to check them out. And that's what the next tip is all about ...

9. Educate Yourself

Even if you didn't like school all that much, you shouldn't invest without knowledge. Or as Buffett put it, "Never invest in a business you cannot understand."

10. Don't Panic

Finally, should markets fall, the U.S. economy tank, or Russia invade Central Europe, don't panic. Remember: The worst of times are often followed by the best.

If you educate yourself, hang tough and follow these other tips during unpredictable times, you just might find some shelter from whatever storms may come.

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."


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19 Comments

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Jim Adams

Here is what happened on January 1st 2014:

Top Income tax bracket went from 35% to 39.6 %
Top Income payroll tax went from 37.4% to 52.2 %
Capital Gains tax went from 15% to 28 %
Dividends tax went from 15% to 39.6 %
Estate tax went from 0% to 55 %
Remember this fact: if you have money, the democrats want it. These taxes were all passed only with democrat votes, no republicans voted for these taxes.
These taxes were all passed under the affordable care act , aka Obamacare.

May 15 2014 at 10:27 AM Report abuse +2 rate up rate down Reply
alfrankenfool

Don't vote for Democrats.

May 15 2014 at 7:57 AM Report abuse +2 rate up rate down Reply
sfreedomsoul

Invest in the Tower of Babel and you too can touch heaven.

May 14 2014 at 7:54 PM Report abuse +1 rate up rate down Reply
1 reply to sfreedomsoul's comment
jdykbpl45

Obama's Babel!

May 16 2014 at 2:35 AM Report abuse +2 rate up rate down Reply
jjkrjw

This is one of the better articles I've read from Daily Finance, but maybe I feel that way because it has assured me I've done the right things.

May 14 2014 at 7:01 PM Report abuse +1 rate up rate down Reply
vlady1000

Diversify outside Wall Street.

May 14 2014 at 5:50 PM Report abuse +1 rate up rate down Reply
Ronald Smith

Every single time i have ever made a stock investment it has only cost me . I only buy the most consertive and the add more consertive to that ... never a high risk with high returns and after you pay the yearly fees and hold on for 20 years you actually have not made a dang dime. Never Again my friend . I would of had been better off putting the savings under my bed . ( Fact ) IRA'a are a total rip off , both traditional and Roth so get your money out as quick as you can . only buy real estate at least you can get back what you paid for it down the road.

May 14 2014 at 4:33 PM Report abuse -2 rate up rate down Reply
2 replies to Ronald Smith's comment
lbbatthebeach

OK, Ronald, I'll bite - How do you figure IRAs are a "total rip off"?

If you are not able/willing to do the research to successfully invest in stocks, perhaps you should consider investing in mutual funds or exchange-traded funds rather than individual stocks. The average annual return for the S&P 500 since its inception is over 11%.

May 14 2014 at 6:32 PM Report abuse rate up rate down Reply
jjkrjw

Sounds like you better stick with the Spyders. (If you were paying yearly fees, then you must have been buying mutual funds or something other than individual stocks.) But go ahead and stick it under your bed and watch it waste away with inflation.

May 14 2014 at 6:58 PM Report abuse rate up rate down Reply
Big John

"10 Steps to Protect Yourself From the Next Financial Disaster" You mean to tell me that someone is finally admitting we had a financial disaster after eight years of Bush and Company. Yes and it took place in September of 2008, before the elections and people are dying to put the same crowd in control of the economy again. Wow!!!

May 14 2014 at 4:17 PM Report abuse -4 rate up rate down Reply
3 replies to Big John's comment
jdykbpl45

Live within your means.

May 14 2014 at 2:29 PM Report abuse +2 rate up rate down Reply
1 reply to jdykbpl45's comment
lbbatthebeach

Did you even read the article?
Hint: It had nothing to do with budgeting or debt reduction.

May 14 2014 at 6:35 PM Report abuse rate up rate down Reply
1 reply to lbbatthebeach's comment
jdykbpl45

Stupid, it is basic!

May 16 2014 at 2:38 AM Report abuse +1 rate up rate down