When asset bubbles occur investors in the market believe that no harm will ever come to them again and that asset prices will simply continue to increase endlessly. In this most recent bubble, induced by the Federal Reserve's cheap money policies, that is again exactly what happened, that is similar to the credit bubble and similar to the Internet bubble, but the environment that we are in today is vastly different than the one that took down the dot-coms between 2000 and 2002.
Not unlike those prior two recent bubbles as this one begins to burst many investors are reluctant to recognize the risks that exist. During the credit crisis, which is something that most all of us remember, people were in denial. It wasn't as bad as it seemed until such time as the market had already been decimated. Then, after being decimated investors decided that the risks were real. This is the way of the world when it comes to the emotional reactions that often exist during both the asset bubbles and the aftermaths that follow.
Because most investors are so closely tied to the direction of the stock market and the economy their wealth changes with changes to stock market and economic conditions, and in environments where asset bubbles occur regularly riding that roller coaster can be very difficult. This is one of the reasons that I advise my clients against buy and hold strategies. These type of strategies are reliant on both the stock market to increase and the economy to perform well, and in situations where that is true buy and hold strategies can look good. Between 2009 and now, for example, buy-and-hold investors have looked like geniuses, but by simply expanding the date back to 2007 those same people are barely making any money.
Unfortunately, I see this happening all over again. Buy and hold investors were down as much as 50%, some of them panicked and sold at the bottom, and if this falls apart again like I think it can I expect many of those same types of investors to panic again and sell at the bottom again like they always do. The best practice is to sell when everyone else is buying, and that is exactly what you have been hearing from me for virtually this entire year.
Reluctantly, after the first day of the year and for a couple short months thereafter I did adopt a bullish view on the stock market, I even traded it long in April, but I have also successfully, for my clients, navigated every major asset bubble that we have been witness to and because I also identify what we are in today as an asset bubble my recommendation to clients is to engage long-term strategies that are not reliant on market direction.
For institutional investors, this is very difficult to do because they are not nimble and they do not have the ability to control risk like individual investors do. Individual investors have a competitive advantage; they just drag their heels because they are guided by those same financial institutions that recommend that you always stay invested, primarily as a business model so that they can continue to generate fees for the firm. The traditional approach to investing is something that these large institutions have recommended to their clients, but something that those institutions do not necessarily follow themselves.
The large financial institutions that primarily control this market will turn on a dime, and when one hand is telling you to remain invested so that you keep generating fees for the firm, the other is shorting the market aggressively. A transition like that seems to be appearing in front of our eyes, and the investor who will be left holding the bag is almost surely going to be that buy and hold investor again.
Countless times I have recommended alternative strategies that are proactive and that have been proven to work even when the market falls, and that is what I am recommending to everyone today. Engage proactive risk controlled strategies that do not rely on the market's direction. Do not engage unnecessary risks, and make sure that you avoid the temptation of swinging for the fences.
Anyone who reads my work knows that I have been recommending iPath S&P 500 VIX Short Term Futures TM ETN (VXX), we also recently bought ProShares UltraShort Real Estate (ETF) (SRS) and we sold SPDR Gold Trust (GLD) before the breakdown, but those positions do not reflect longer-term strategies but instead one-off trades. It is the longer-term strategies that are offered by Stock Traders Daily, the proactive ones that are able to navigate any market environment, which I believe investors should focus on. One-off stock selection is fun, it is also more traditional, but it is these proactive risk controlled strategies that empowers the competitive advantages of individual investors that can allow us all not only to make money regardless of what happens to the stock market or the economy, but if this market falls apart like my longer-term macroeconomic work, The Investment Rate, suggests, by engaging in these proactive strategies near these market tops we will also have the financial ability to pick up the pieces and buy at the bottom when it all comes tumbling down again. Remember, the Market is about where it was in April, so we are still near a top even though it has fallen hard recently. You are not too late!
My recommendation is that everyone sell not only their stock market and bond market investments, but also their excess real estate, and adopt a proactive approach to the market that is able to work even when the market falls. I have helped my clients navigate through every one of the prior asset bubbles and the subsequent collapses, and my assessment is that it is about to happen all over again.