By Jim Jubak
Woody Harrelson never stops killing zombies in "Zombieland" to ask, "Should I buy more inflation-protected Treasurys?" With the zombies at the door, at the windows, in the car . . . it would be a silly question.
But it's exactly the kind of question investors must ask. We may think the zombies are coming -- in the form of the U.S. debt, a global demographic wave of aging that will soak up savings, a crashing dollar, global water wars or something else. But they aren't here yet, we don't know when they might arrive, and we can't be certain they will show up at all.
Cowering in a bowling alley, counting our bullets and waiting for the first hand of decaying flesh to poke through a window isn't an option.
But what is? How do we prepare for the attack of the zombies when we don't know when, or even if, it will happen?
10 ways to brave the horrors
Let me give you 10 ideas for balancing the need to make money in the market in the near term with providing zombie protection in the long term:- Don't deny your fears. In zombie movies -- in fact, in virtually all horror movies -- there are signs that bad things are about to happen. The family dog disappears. Birds mass on the telephone wires outside the school. The local archaeological dig discovers an artifact with indecipherable writing (that turns out to be a warning not to open that tomb). The character who ridicules everyone who believes these warning signs always meets a horrible death.
- Don't let fear paralyze you. The character who stands horrified in front of the vampire, the giant spider or the zombie dies. The character who runs away gets a chance to be frightened another day.
- Study the fear. The scientist who can dissect the alien creature, go face to face with the slime-dripping jaws and wipe away the disgusting goo stands the best chance of beating the menace, So, do your own dissection by compiling a list of the legitimate long-term fears. (Try not to worry about everything. Yes, Earth could get hit by a comet that sends out an electromagnetic pulse that takes down every computer system, but I don't think you need to plan for where to safely keep your paper backups. You'll have bigger problems.)
A reasonable list of worries would include: huge levels of sovereign debt in developed economies from Greece to the U.S. to Japan; a steady decline in the U.S. dollar; runaway increases in the money supply in both debtor nations (such as the U.S.) and lender nations (like China); an increasing tolerance for inflation; rising nationalism that makes global solutions, such as for currencies, climate change or water scarcity, extremely difficult; a global financial system that still has too much bad debt stashed off the balance sheets of banks, state-owned businesses and national governments; and an aging world population that makes solving any of these problems harder and that threatens a steady drain on savings -- in those countries that have any.
- Remember that rising fear means rising volatility -- and that volatility can equal opportunity. Volatility is scary. I'm not fond of 200-point drops in the Dow industrials ($INDU) followed by 300-point jumps or 10% monthlong rallies followed by 15% corrections. But the heightened volatility of the past decade is likely to go on for a while. That's going to drive the buy-and-holders nuts, especially if the net gain or loss is close to zero. (In some cases, we should be so lucky. The Nasdaq Composite Index ($COMPX) peaked at 5,049 on March 10, 2000. It closed Monday at 2,491.)
But it will mean lots of chances to buy low and sell high. You don't have to be a day trader or even a trader to take advantage. Volatility can be a good friend even to long-term portfolios, because it gives an investor lots of chances to build positions over time. And to sell partial positions at a profit.
- Don't join the panic. Towns about to be hit by a plague of zombies, an outbreak of giant worms or an uprising of ghouls from the cemetery under the subdivision descend into panic. People run hither when yon would have been safer. They flee in crowds when ducking down a side street would make escape easier. In investing, we say that markets swing to excess, and nothing gets more excessive than a market that knows it really has something to fear.
Continued: Buy your hedges early
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