Subprime And Credit Crunch Or, How To Benefit From A Crisis

This must be about the 10th full-scale financial panic I've seen since the mid-1990s.

Could anyone that's been with the stock markets for a while ever forget Long-Term Capital Management? How about WorldCom, or the panic after 9/11? Or what about the financial crisis that gripped Asia in Summer 1997 or Russia just one year later? And what about the SARS crisis in Asia back in 2003? There have been plenty more. And during each one, serious and intelligent financial figures around the world assured us that the economic world might collapse altogether.

Maybe it will one day. But you could get old waiting. And what does it matter anyway? After a crisis there will be another already waiting down the road. And a crisis will also pass like they all have and make way for the markets to continue going up.

Do you know where the Dow Jones was in 1982? At 776 points. And look where it's now! And the same can be said for all other indices around the world as well.

Subprime lending is highly controversial and refers to bank loans that do not meet loan guidelines i.e. it may or may not reflect the credit status of the borrower as being less than ideal and may not even reflect the interest rate on the loan itself. Simply speaking, a subprime loan is a bank loan someone gets that can't really afford it. Also, generally the interest rates are considerably higher than the prime rate.

The U.S. mortgage and subprime crisis began with the bursting of the U.S. housing bubble in late summer of 2007. Loan incentives and a long -term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favourable terms later.

But as interest rates kept rising from their historic low of 1% in 2001, borrowers couldn't pay off their loans and mortgages anymore. The result was that a wave of foreclosures started sweeping through the United States and banks had to start writing off millions and billions of dollars in losses. Even foreign banks started stumbling seriously due to their involvement in the housing crisis.

One practice was to convert these subprime loans into bonds making them look like a safe investment. But as the housing bubble and hence the credit market crumbled, these bonds started crumbling too making them worthless.

But, whether you take a subprime crisis, financial crisis, credit crisis or whatever other crisis, a crisis is also good for new opportunities. And many people are going to get rich and retire early due to the decisions they make today.

Here are 10 things to think about and consider if you are trying to manage your investments during turbulent times:

1. Invest during bad times when everyone bails out and the panic hits the front pages. Wait for a few days to see if the panic continues driving the markets down. If a bottom has formed and the selling has stopped, start getting in at the low prices! Until now the markets have always recovered. Just look at the crises I mentioned above. And what's left of it? Not much, if not even, nothing!

Yes, there have been a few exceptions in history like Japan after 1990, but they are rare. It's hard to remember, for instance, just how doomed Thailand seemed during the 1998 Asian financial crisis. But if you invested in their stock market at the lows, you've made several 100% in profits since.

2. Don't speculate. Investing is serious business and it should be treated as such! It takes a 100% profit to recover from a 50% loss. So stop wishing you bought Ford in 2003 when it doubled.You're better off looking for securities that offer a more modest and predictable gain. Very often the tortoise really does beat the hare in the stock markets. Look at Warren Buffett. He ain't the most successful investor in the world and a multi-billionaire for nothing!

3. Don't have too many positions and diversify your investment. Between 10 to 15 stocks is way enough and with these 10 to 15 you can be diversified in all major sectors like technology, pharmaceuticals etc. Just don't invest in cyclical sectors on a long-term basis like the airline, automobile or building and construction sector. They depend too much on the economy.

So do others you may say. Yes, but not to such a large extent. Even in bad times you'll always need food but not necessary that brand new car that you've been dreaming of. A second hand will also do for a while! So which company will be better off in a recession, Wal-Mart of General Motors? I guess the answer is self-explanatory!

4. Be very wary of any boom. The Internet frenzy in the '90's is the best example. Every boom has eventually come to an end. You can invest short-term in boom if you know how - like with stock options for instance. Otherwise never try to invest into the boom as such believing that you will now get rich very quickly. Rather invest in strong and solid companies that will automatically profit from a boom.

In the '90's it would've been wiser to have invested in Cisco Systems or Microsoft than in Fortune City or other Internet start-up's that vanished off the face of the earth faster than they appeared.

5. Don't take what analysts or so-called "financial experts" say too much for granted. If you ask 10 experts you usually get 11 opinions. Too much of all this background noise is not good at all and will only confuse you in your trading decisions. And confusing trading decisions will only make you losses instead of profits!

6. Invest in stages. I can almost guarantee that if you wait for the perfect moment to make that one big bet on the market, you'll either be way too soon or you'll miss the boat altogether. One good method is to keep some money for cost averaging should the one or other stock get hit bad, which can always happen.

7. If you want to play it safe - especially if you're a conservative investor - then only invest for the long-term. That means five years or more.

8. You don't have to pick individual stocks if you don't feel comfortable with the idea. Mutual funds will give you broad exposure to almost any security and sector you like.

9. When choosing a mutual fund, look for funds that have a terrific long-term track record -ideally 10 years or more - and that invest in different markets, and hold cash. That's really the only way they can outperform over time.

10. Finally, if you're simply too afraid of taking any risks at all, think about what inflation is going to do to you if you sit in cash on the sidelines. This also includes these dreadful savings accounts. There are literally no risk-free places to hold money.

And never, never ever use money that you need for ongoing needs for any investment. Even if you only need the money 6 months down the road from now. And never ever get into debt by borrowing money or taking up a loan to finance your investments. Only use that portion of your own cash that won't wipe you out financially should an investment turn sour.

Yours in Successful Trading

Ricky Schmidt