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April 01, 2009

7 Things to do Right NOW to Protect your Prosperity
by Paul Mladjenovic

Watching the policymakers in Washington is not fun and I do not find it good sport. It is really quite unctuous but I have to watch because it is my business to do so. Everything they do will affect me, you, the people we love and millions of our neighbors. Right now the public is still reeling from economic and financial shockwaves that have rocked us during the past 12 months. As I write this, the stock market is enjoying a brief bear market rally but please keep in mind that it will be temporary.

Nothing emanating out of Washington will solve our economic problems. They only have the ability to make matters worse. MUCH worse. A few years ago I told my clients, my students and readers that I expect an inflationary depression. I get into greater detail in my recent seminars. The latest data and political events make that forecast a greater likeliehood. The politicians and bureaucrats have failed to learn the lessons of history. Let me summarize them:

1. When you have too much debt...stop borrowing! You can not borrow your way out of debt. If too much spending, consuming and borrowing gets you into economic trouble then you can't get out by yet MORE spending, consuming and borrowing. Is this so damn hard to understand?! Who thought this crap up? (see next item)

2. The "brilliant" John Maynard Keynes was a crackpot and his flawed economic policy ideas were (and are) grotesquely stupid. History tells us to discard his quackery NOT to embrace it as we are doing now.

3. Higher taxes hurt the economy while tax cuts help the economy. This is not just a nice idea or some dopey slogan... it is common sense and reality has proven this point time and time again. At this point, even if taxes tripled in America it wouldn't make a dent in the trillions they've been squandering recklessly. Look...Americans are hurting...why not let them keep more of their hard-earned money?

4. The most common collapse in economic history is a currency collapse. A currency collapse occurs when a government prints a currency into massive OVERSUPPLY. It is first called inflation and if you continue it is called HYPER-inflation. Our government is spending trillions now and is planning to spend trillions more.

5. The second most common collapse in history occurs when government gets too big. Remember that government (good or bad) gets its resources from the economy. Economies collapse under the massive, bloated bureaucratic weight. It has happened with communism (such as Yugoslavia, the Soviet Union, etc.), fascism, etc.

In various degrees and in uneven ways, the above 5 lessons are being ignored RIGHT NOW. This is very sad. Just because the politicians and bureaucrats are not learning their lessons doesn't mean that we shouldn't learn our lessons. We have to take control of our own situations. Doing the right things now mean that you can not only survive their wretchedly stupid policies but also that you can thrive.

I think that most of the talking heads on TV are generally clueless which tells me that millions of us are getting bad information. That, in turn, means that millions will get hurt in some way. Let me give you an example.

In 2005, in both my seminars and my newsletters and essays, I warned that the housing bubble would pop and the shockwaves would not only hurt those directly involved in real estate but many indirectly through financial meltdowns that would affect Wall Street such as pensions, mutual funds and other financial institutions. A student in my seminar said "Hey...you're wrong! Real estate experts such as Bob Vila and Donald Trump say that there is no bubble and that the real estate market will be fine. Why should I listen to you?"

I respect those two very much and they are indeed experts at what they do. I will never argue with them about home improvements or how to construct a glitzy tower. But I do stick to what I know intimately and that is the economy and its affect on what I educate others on (such as the stock market). In March I turned 50 and it was also the 28th anniversary of my business. In addition I was born in a communist country (socialist Yugoslavia) and we fled it in 1963. Watching from a safe distance in America, we saw Yugoslavia attempt its own "stimulus plan" in 1989 which only ignited an inflationary depression. Social chaos and conflict ensued. This brings yet another ominous point that our policy makers need to learn from history:

Cause and effect:
From economic disintegration comes...social disintegration.

The following is an excerpt from the March'09 issue of my newsletter, the Prosperity Alert. You can survive and you can thrive but the first step is gaining information and knowledge that is practical and useable in this current economic climate.

This is a short list but these can be done easily, painlessly and immediately:

1. For 401K plans, IRAs and other pension plans - Get all stocks, ETFs and mutual funds to be switched to "human need" investments. In other words, make sure the stocks and funds in your accounts should be primarily (only?) in those investments and vehicles tied to "human need" such as food, water, energy, consumer staples, grains, etc. Talk to your financial advisors or pension administrators about making the changes.

2. Sell other stocks or use "trailing stops". As I write this, a nice bear-market rally is going on in the stock market. Use this as an opportunity to sell stocks in vulnerable sectors (such as cyclicals and consumer discretionary). If you are not sure, then at the very least use "stop loss orders" or "trailing stops". I cover them in detail in the book Stock Investing for Dummies (the 3rd edition is now available). Most brokers can easily implement these orders for you.

3. Accumulate gold and silver bullion (coins or bars) that will help to act as insurance in an inflationary environment. Since the beginning of the decade, gold and silver have nearly tripled while the stock market is way down. Gold and silver bullion coins (for example) are easy to buy and sell and they are a good diversification away from paper assets such as stocks and bonds. No one has ever had to "bail out" precious metals.

4. Accumulate cash positions in savings accounts or treasury money market funds. This should act as an emergency fund or cash cushion. You should have the equivalent of at least three months (or more) worth of gross living expenses safely tucked away.

5. Savings Bonds - such as the "I" & "EE" - are safe vehicles and perfect for small investors. EE savings bonds can be bought for as little as $25 and their rate is tied to interest rates while I bonds' interest rate are tied to the official CPI. I bonds can be bought for as little as $50. Get more details at your local bank. Savings bonds are issued by the US Treasury, are free from state & local taxes and are very safe. They may not beat the real-world rate of inflation but they are much better than long-term, low-interest, fixed-rate vehicles such as standard bonds.

6. Downscale all nonessentials. See what you can cut out of your budget. Eating out just 1 time less per month (for example) could easily save you $1,000 per year. All of us can find something that we can cut or reduce in our budgets.

7. Set-up a pantry. At this time, non-perishable foods (such as canned soups) are still very inexpensive. Stock up! When inflation goes into double-digits (and I think it will) you will be glad you did. With interest rates so low and inflation in the wings, having non-perishable foods and beverages on hand is an easy winner in your budget.

No...it's not complete but it's a good start. And gang...I don't tell you anything that I don't do myself. I personally live a modest lifestyle and yes we keep a pantry, etc. Yes, there is more to know and more to do. I spend a lot of time in my seminar, "The $50 Wealth-Builder" informing people that even modest steps can go a long way to protecting you and you hard-earned money.

While the economic environment is "deflationary", take the 7 steps listed above seriously and get them done because we have no idea exactly when the inflationary depression will hit but a serious analysis of current economic and political events tell us unequivocally that it is coming.

It's better to be many months too early than a day too late. Take care...

Paul Mladjenovic, CFP
www.ProsperityNetwork.net

Paul Mladjenovic, CFP is the author of Stock Investing for Dummies and his national investing & financial seminars are at www.ProsperityNetwork.net. His blog is at www.Mladjenovic.blogspot.com and he is the editor of the Prosperity Alert newsletter.

Copyright © 2006-2009 Paul Mladjenovic. All rights reserved.

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