They chose financial independence over home ownership.

This is somewhat extreme but watch how this Canadian couple chose financial independence over home ownership.  They are in their 30s and,...

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Plan and hedge.

Sunday, June 6, 2010

Having a plan is important in almost everything we do.  We want to do well in school, we plan. We want to do well at work, we plan.  We want to start a business, we plan.  We want to have a happy marriage, we plan.  We want to do well in the stock market, we plan.  It goes on.

 Embarking on any journey without planning is foolhardy, in my opinion.  We might end up drifting and, maybe, even destitute as we use up all our resources. Some might enjoy this kind of gypsy like existence but I surely don't. However, does it mean that if we plan well, we will always do well? I think we know the answer.

I believe in hedging in a world of uncertainty. There is never anything that is for sure. See how the stock markets rallied almost non-stop for more than 12 months since March 2009? Along the way, at every dip, bears said a correction was going to happen but the markets powered on upwards.

Mr. Market does not care what bulls and bears think. Mr. Market will act how he acts and that's that.

In a world of uncertainty, hedging has to be part of our plans. For example, I believe in accumulating high yields for passive income but if I see the high yields developing a downtrend, what do I do? Sell some as they form lower highs. I could perhaps buy them lower. What if they don't go lower? Well, that's why I would only sell some.

Always remember that FA is about value and TA is about price. Value and price are not the same thing. FA tells us something but TA might tell us something else. We might be holding the stocks of very good businesses but if the prices are in a downtrend, selling some is what I would do. It is the pragmatic thing to do. You have heard this before but I will say it again: Don't be overly bullish or bearish, be pragmatic.

After the bloodletting on Friday in the European and US stock markets, what will happen tomorrow in Asia? Most would guess that the stock markets in Asia would follow suit. I am inclined to think that way too but the truth is I don't know. Maybe, the SSE would throw a positive surprise and send stocks upwards. Who knows? This is the state of the markets now: one of heightened volatility.

In a Tech Ticker interview, Felix Salmon of Reuters had this advice to give: "Rather than suffer through the tough times, Salmon’s simple message for the average investor: Sell your stocks. Now!"

Personally, I think this is somewhat extreme but it might be good advice for people with weak hearts. Just don't bang your head against the wall if things go the other way instead.


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