Just a quick search via Google, and the term “double dip recession” returns 1.8 million results. The topic is hot, and many people, if not the majority, believe that a double dip recession is on its way. Many articles speak of fear of a double dip, and try to anticipate whether and when a double dip might hit us.

Although such discussions are highly interesting, I tend to focus more on how to handle such a recession for now; because if it hits us, there will be nothing we can do to stop it, no matter whether we fear it or not. The question I ask myself is how I handle it, and even more importantly what I can do to stay out of trouble when it hits.

My first concern is securing my income. I am not yet in a position in which I run my own company, or where I can live off my savings for years. So, having a job is important. Where I live, in Germany, it is very difficult to fire employees. However, if a recession hits, even those employees doing a good job may be fired if else the existence of the company is in danger. Since I am male, single, and have no children, I would the first person gone. I would receive 70% of my last salary for nearly a year, but what about after that?

I took an insurance a while ago, which aims specifically at unemployment through no fault of one’s own. This insurance ensures that I receive up to a specific amount. I have calculated my minimum living standards, and added a buffer, which is the minimum amount I need to live off. If for some reason my living expenses go up (e.g. I bought a car, or rent increased), I can adjust the insurance to a new payout level.

Secondly, I continuously keep increasing my cash assets. This is my emergency fund, which I can use for unexpected expenses, either in or outside a recession. Having cash readily available gives me a more secure feeling.

On the long run I am investing in mutual funds. The amount is still small, but as soon as I sell these shares I will need to pay taxes. Therefore, I tend to keep the funds in my portfolio, but I will stop investing more money into them until the recession is bottoming out. This allows me to not unnecessarily increase my losses. Additionally, I might buy put options on one or more indexes, as a form of insurance. As the mutual funds (or stocks) are losing value, the put options are gaining value and are balancing out the losses, either completely or partially. However, I will monitor economic developments closely, and not judge too soon. The technical analysis functions help me to make an estimation of whether we are simply having volatile markets, or whether a recession is in the making.

When it comes to stocks, I tend to follow cyclical movements. I am not a big fan of the notorious buy-and-hold strategy, since these strategies were largely developed in the last millennium, where markets were not as volatile as today, and steadily increasing. When I buy stocks, I will look at undervalued or high-potential companies, but I will consider their cyclical movements. This means that I will set a stop-loss at all times, and in the event of a recession the stock will be sold automatically. Following the recession movement, it allows me to re-enter the market at lower prices.

During a recession, my expense policy changes slightly. I watch more closely not to buy items I do not necessarily need, and I am very keen on building my cash emergency assets. I might use the car less and take public transportation, and use each and every opportunity to save a bit of money. Also, I find a recession a great opportunity to visit friends at their homes, or invite people over, and just stay home and have a fun evening.

Surely I hope the double dip will not come… but a next recession will come for sure. Just as a fact: by the end of 2012, another batch of mortgage contracts will phase out, and there is a real estate bubble in China in the making, which is 5 times as large as in the US in 2008/2009. This is another reason why I prefer to stay out of any mutual funds or stocks with a real estate focus.

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I have to admit, I don’t have the best ‘education’ when it comes to doing investments. I didn’t grow up in a family, that taught me all about finance, and even during my education International Business Management, investments and the stock market wasn’t dealt with in great detail.

I did my first investment in 1998… or rather speculation, when I bought an option in a company, which later appeared to have falsified its bookkeeping; and thus they went bankrupt. I didn’t touch investments for a few years. Then I learned a bit more about fundamental analysis, and I thought I got it… I learned about technical analysis, and I had thought I had understood it.

But it’s when I started reading about behavioral finance, that kind of opened my eyes. I realized that everything I had done wrong, and my losses were more the result of submitting to my emotions rather than bad analysis. I want to deal with three of these typical emotions, and how they can ruin virtually any potentially good investment.

Information Bias

One of the main problems, is that people are very subjective beings. I always found it strange that for some reason I found a lot of proof, supporting my belief about a particular stock, bond, or mutual fund. Then, it didn’t work out as it was supposed to, I panicked, and suddenly I found tons of material, supporting the opposite.

Information bias is a distortion in the perception of human beings. If we have an opinion of something, we unconsciously search for information that supports this opinion, or it seems to be dominantly present. As such, we may make wrong decisions. Information bias often exists since people want to go with the flow, or the masses. Not going with the masses might mean making a fool of yourself, or being put off as ridiculous.

Selling too early, selling too late

Being successful in the stock market often means limiting potential losses and letting profits rise. At some times, I have been guilty of doing the exact opposite: selling very early with a small profit, but selling much too late, letting my losses be driven up.

Relating to stocks, we often become very excited at small changes, and the bigger the change, the more relaxed we get. Therefore, many people tend to sell early at a small profit, being euphoric that they made a profit and fearing that they might lose it. On the other side, these people might become scared at having a small loss, hoping that the stock will recover. If this does not happen, often people tend to think that it would be useless to sell the stock now anyway, and the further the stock falls, the less emotional and involved they become. It is not unusual, that these people sell the stock at exactly the least beneficial point: when it has reached its bottom.

Making up for losses

Luckily I have been largely able to control this. However, many people want to make up for their losses, just as quickly as they occurred. This is very difficult, since a 50% loss requires a 100% profit to make up for it. Many people are willing to take more risks, and invest more money after they have lost some, just to make up for it. Some go bankrupt in their attempts.

I know I have a lot to learn, and I will certainly get more into this topic and write about it occasionally. Until then, I can recommend the following articles I found, which I find worth reading:

• Portfolio Management: The Pitfalls of Behavioral Finance
• Behavioral finance to the rescue?
• Why Smart People Make Big Money Mistakes (and How to Correct Them)

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In all the emotion and uncertainty of today’s turbulent markets, we tend to lose sight of the big picture. Well, at least I do. The human mind has the unrivaled ability to forget, or to distort memories and experience, or to think things are alright whereas they are not, or to think things are going down the drain whereas they won’t…

I bumped into a website today, which provides exactly that: the big picture. Which crises did we have in the past, how did the major exchanges develop during the past 100 years, and where do we stand today in comparison to past major bear markets?

Since I am not in favor of simply copying material, below are the links in question:

• S&P 500 Index: Current Market Snapshot (Daily closes from 10/9/2007 – Present)
• S&P Composite: 1871 – Present (Inflation-Adjusted Secular Highs and Lows)
• The “Real” (Inflation-Adjusted) Mega-Bears

Since I am not the hardcore-type of international investments expert, I want to spare any additional comments on these charts about possible future developments. But there are some amazing similarities…

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I finished reading CASHFLOW Quadrant, by Robert T. Kiyosaki yesterday and I feel a bit obliged to write about it. On the one hand, because the book is partially filled with incomplete information, being too vague, and for some part promoting illegal practice (e.g trading stocks based on insider information), on the other hand because the book still does make some good points… and it’s a great motivational book by the way. I know, I know, when I read my first book of Robert Kiyosaki, I was quite positive about him, until I did some further research on the topic.

The Cashflow Quadrant basically describes four different quadrants, which characterize how people earn their money. Without wanting to go into too much detail, the left side of the quadrant represents employees and self-employed people, which count for around 80% of the world population and possess about 5% of the wealth on this planet. The right side of the quadrant represents the 20% of the population possessing 95% of all wealth: business owners and investors.

This means, that people on the left side of the quadrant are putting time and effort into a businesses, which are owned by people on the right side of the quadrant, and they get a small fee for doing so. Therefore, the one and only way to reach true financial freedom is to switch from being employed, to owning a business or becoming an investor.

The CASHFLOW Quadrant is not only a great motivational book, but it highlights a way of thinking, which most people are not familiar with; it tries to pull people away from their inner reality, which is usually to work hard and make a career at a large and noteworthy company, and to give them a taste of what life would be like if they would mind their own business, in stead of someone else’s business.

Robert Kiyosaki does give some real life examples, such as investing in real estate and then having someone renting it to pay back mortgage. Additionally, his advice is more based on psychology and ‘attitude matters’, than on the science of doing business.

Still, one phrase which caught my attention was ‘Mind Your Own Business‘. Relating this to what I read in the CASHFLOW Quadrant, and relating this also the all the negative criticism, I give it two meanings:

• Reaching true financial freedom and exceeding the living standards of the average working population (this last phrase is important to me, as some people might find an average employee’s salary as satisfying) means building my own business and investment activities; it means that the time of work I put in my activities is detached from my earnings, and it means that I should be minding my own business, instead of someone else’s business.
• Having greater confidence in my abilities, especially in my abilities to learn by doing. It is very easy to gain more and more, and even more information from various books, mentoring sessions, or coaching seminars… but many so-called gurus’ main business is just being a guru. Knowing this, I find greater potential in myself to select information I can truly learn from, from recognized authors in their field, and to take small steps towards building wealth and learn from that.

Mr. Kiyosaki seems to be under the attack of many criticists, obviously not without reason, claiming that Robert Kiyosaki is a motivational speaker rather than a refined business man, and fully incapable of providing financial advice. If you want to read more about criticism on Robert T. Kiyosaki and his work, you can visit John T. Reeds site, or the article ‘Rich Men, Poor Advice’ on the Wall Street Journal.

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I had quite an interesting flashback lately; as I was sitting on my couch and letting some things pass through my mind, I was struck by the fact that there are so many things I could have done much sooner, and thereby enhance the quality of my life and my personal financial situation. Then, why hadn’t I? Quite simple really: I just didn’t know… or at least I didn’t know they were that important.

In order to help some of the younger readers, I have compiled my personal top 10 list of things I wish I knew when I was a teen. I sincerely hope that for some of you it would mean a positive change of where you are at, and where you are going.

#1 – I wish I had learnt earlier to set my goals in life. It may seem a bit stupid, but during my teens my top priority seemed to have a lot of fun, while at the same time I didn’t really know where I was heading. I had no real goal in life, which at a later age resulted in me trying out many things which were not going anywhere. Now, at the age of 32, I realize that what I do isn’t really what I want to be doing, and it is much harder to change the entire structure of my life.

#2 – I wish I had studied more. I focussed on the ‘fun factor’ of life so much, that I really didn’t realize the importance of a good education. At present, I have a bachelor’s degree, and I realize that many jobs that I really want require a Master’s. Also, graduates or even post-graduates earn much more than bachelors.

#3 – I wish I had worked more. I know that parents are supposed to support their children up to a specific age legally, in The Netherlands it was up to 27. However, this also means being dependent one one’s parents. There were so many things I wanted, which I never got. In The Netherlands, everyone is allowed to work when they reach the age of 15, and I wish I had grasped that opportunity, to build on my own financial freedom. Additionally, when I went to college, I took a huge loan which was absolutely not necessary; I could have financed everything by working on the side… in stead I am now stuck with monthly payments which cut a big hole in my budget.

#4 – I wish I had aimed for independence sooner. I lived at my parental house until I was 21, then I moved out because I was going to college in another city. However, I could have moved out much sooner, enjoying all the freedom of living by myself. I am sure it would have done me good, and it would have relieved me of all the pressure at home; it would have made me more mature, and given me more energy.

#5 – I wish I had started tracking my finances earlier. I don’t even remember all the money I spent on drinks, clubs, going out, and other unnecessary items. Sure, a good social life is crucial, but if I would have tracked my finances carefully, I would have discovered that there was so much savings potential; I could have gotten most out of my money.

#6 – I wish I had started investing sooner. In stead, I used to park some of my money on my savings account, completely ignoring the benefit of higher return rates from investments. Investing some of my money would have allowed me to build wealth, and my future.

#7 – I wish I had done more sports. Actually, I had hardly done any sports in my late teens and twenties, simply because I had other priorities and I was lazy. However, doing sports regularly would have given me more energy, it would have kept me fit, and it would have built a routing, making it easier to do sports at a later age as well.

#8 – I wish I had discovered the importance of networking. I always tended to see networking as some form of superficial ‘blabla’, which I could do without; I wanted to take responsibility for my own successes. Now, I realize that networking is an integral part of life, making things easier, finding the good jobs, or even getting some tips and hints on things… and it is a great way to build a large social circle.

#9 - I wish I had become entrepreneurial sooner. It is much easier to ‘crash and burn’ when you are younger: your living expenses are much lower, and since you are not accustomed to a higher living standard, it is not difficult to give things up, or to re-build a life if things go wrong. The older you get, the more difficult it becomes. Actually, I started becoming familiar with website development back in 1998, when I developed my first website Dutchtrav.com. Too bad I had never really taken the time to develop it back then, it could have generated some nice revenues.

#10 – I wish I realized the value of time. I remember myself saying ‘I can do that later’, or ‘there is still so much time’. And before you know it, you’re 30, and you realize that you could have gotten so much out of your life. The years are literally passing by, and time is lost, it will never come back again. Therefore, I wish I had learned to enjoy every single moment in my life, and living it to the max.

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