30% Probability That Dow Will Drop to 4000! Do You Have a Plan?

Investors have a short memory. In 1995, the DJIA was around 4000. Today our economy, it could be argued, is actually weaker than it was back then. Our real estate is in the tank, we have double digit employment, and our manufacturing has all but dried up. Add on to that the dire consequences of a potential commercial real estate meltdown and you have the recipe for another financial crisis. Words: 469

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Mark Krieger’s (www.seekingalpha.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Krieger goes on to say:

To be fair, there are some positives we have today that we didn’t have in 1995 – we have the advantages of the internet and low interest rates – very powerful positive forces to say the least. Is it enough to keep our very sick economy from flat lining? Why can’t the market fall back down to those 1995 levels once again?

Is stimulus money “funny money”?
How long can the stimulus money do its job? Printing up money is dangerous – it creates inflation (too many dollars chasing too few goods). It could be argued it is synonymous with a pyramid or Ponzi scheme. Our national debt is skyrocketing and fiscal 2009’s deficit of $1.4 trillion was 9.9% of GDP, the highest level since WWII. We need to reduce government spending by making government smaller and cut taxes to spur economic growth which, I admit, is easier said than done. Finally, one ominous thought – what happens when the foreigners start buying considerably less of our debt?

Tax and spend
The Administration wants to solve everything by throwing big government at it. This is a very dangerous path to take in the midst of a so-called recovery. We need to come up with more realistic solutions to our problems.

Bottom-line
I’m not saying we will drop to 4000, but it’s a possibility (30% probability) that you should be prepared for. My strategy to deal with this risk is to:

1. Put 20% of my net worth into physical gold
2. Reduce 401K positions into 40% stocks and 60% cash
3. Buy defensive stocks with low PE multiples, minimal debt and good dividend yields (mainly food and pharmaceuticals)
4. Spend like a miser
5. Sell short QQQQ as a hedge/insurance policy
6. Reduce personal debt

If the economy and stock market continue to improve I will be leaving some money on the table, but this plan enables me to sleep better at night. What’s your plan?

*http://seekingalpha.com/article/174763-the-dow-at-4000-don-t-laugh-it-could-easily-happen

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint in whole or in part is gladly granted, provided full credit is given.