The 5 New Rules of Investing

Jon Markman says ------

1. Buy and hold is dead.

I hate to be the one to tell you this, but “buy and hold” is a marketing slogan, not a proven investment philosophy! It was invented in the ‘80s by mutual fund companies and Wall Street to lure more people into investing.

Ask any investors who used to believe that “buy and hold” was the right strategy—that good stocks would always go higher if they were only held long enough—what they have now to show for it. Mostly lots of losses.

Look at the brutal roller coaster “buy & hold” investors have been taken on over the last 10 years in the DJIA, NASDAQ, and S&P 500 indexes…

…and how the world’s best blue chip brands—companies like GE, Cisco, Intel, Coke, and Microsoft—went down 30% or more over this same period.

The key to profiting in today’s market is to actively manage your money.

2. Diversification won’t save you.

You’ve heard the bromide that says you can survive anything with a diversified portfolio? It’s wrong. In a down market like we just lived through, everything goes down.

One of the distinguishing features of this bear market has been that all asset classes, economic classes, industries and regions are now correlated with each other. It’s about 90%, the highest since at least 1974, according to one study.

Financial, utility, technology, energy, drugs, steel and real estate stocks… they all went down 52%, 32%, 42%, 38%, 62% and 45%.

Diversification didn’t offer a lick of protection. Just ask the president of Harvard University, who announced not long ago that her school’s well-diversified $37 billion endowment was preparing for "unprecedented" losses that would lead to school-wide spending cutbacks.

3. Speed is in.

Unfortunately, people think they lack the intestinal fortitude to trade more frequently, but what they don’t know is that it doesn’t take guts to trade. It takes flexibility and a good plan. I’ll give you both.

In today’s market especially, it is critical that you take advantage of advances. We have seen—and will continue to see—plenty of big knee-jerk reactions to news that present big profit opportunities for the nimble.

4. Don’t take a knife to a gun fight.

In today’s market, you must use every weapon at your disposal. A mercenary uses whatever weapons work—you don’t just go into battle with your .38 caliber, you take your knife, bazooka and poison with you, too. You never know what weapon will get the job done. Think Jack Bauer — not the Marquess de Queensbury.

The same goes for us. We will use whatever tool gives us the best chance to win today—stocks, options, bonds, leveraged funds. If it can help us make money, it’s in our investing toolkit.

5. The stock market isn’t the most important game in town anymore.

As we just saw firsthand, the credit market has the power to unravel the stock market, cripple the economy and take down major American icons (like Lehman Brothers and AIG). The credit market is now FIVE times larger than the stock market today.

The debt market led stocks down, and I believe it will lead them back up (more on that in just a moment).

Bottom line: You simply MUST understand the credit market to thrive and survive as an investor.

In fact, there has been a very surprising and little-discussed change in the credit markets. Let’s look at what is happening and what it means for your investments.

With due apologies and full credits to the author