3 Rules to Prepare Your Portfolio for the Next Market Turn

It’s getting weird out there.

I’ve been doing this long enough to see things get silly a couple of times.

• Tech stocks
• Housing
• Now commodities

Both on the way up and the way down.

The markets always give you opportunities at the extremes. Problem is, nobody has either the liquidity or the… uh, cojones?… to take advantage of them.

Let’s look at the three key rules on how to prepare your portfolio for the next major turn in the markets.

Rule #1: Hold at Least 20–30% of Your Portfolio in Cash

I am a big detractor of Warren Buffett, but not old Warren Buffett — new Warren Buffett.

The old Warren Buffett did some pretty cool stuff. Several times throughout his career, he has been the buyer of last resort. Most recently when he got those bank preferred at ridiculous yields.

Guess what: You can’t be the buyer of last resort unless you have… drum roll…

Cash!

Who here has cash? When I say cash, I mean cash as a significant percentage of your portfolio. 20–30% at least.

Having cash is so important.

Rule #2: Don’t Be Afraid to Underperform

Now, when tech stocks crashed, I had the cash, but I didn’t have the cojones.
When housing crashed, I didn’t have the cash.

Finally, in the middle of the commodity crash, I have cash. And I am deploying it in regular intervals (find out how in my monthly newsletter, Street Freak).

I see no point in ever being fully invested. It severely limits your options.
In the old days, mutual fund managers had the flexibility to raise cash in downturns. Now they really don’t. There is a lot of pressure for them to remain fully invested.

But you have the ability to carry around cash. That means you may underperform in a bull market, but it also means you will be able to take advantage of opportunities in a bear market.

Problem is, if you find yourself short on cash at this moment, it’s probably too late to raise it.

Rule #3: Be Patient

Here is the thing nearly everybody forgets about markets:
Trends take a lot longer to play out than you think.

For example, people started saying that tech stocks were overvalued as early as 1996.

They went up for four more years. That was the ultimate pain trade.

The way down was even worse. The Nasdaq 100 Index (NDX) was down 50% in a year. But the bear market still had two more years to go.

When I talk to people about this commodity crash, I tell them that the closest parallel is actually July 2002. Tech stocks went down day after day after day and got to absurd levels. Go back and see where you could have bought AMZN, or MSFT, or EBAY.

If you had the cash.

People started shorting banks and homebuilders as early as 2005. Most of the people I was running around with back then knew there was a bubble.

The top was two years later. Two years of pain.

The bottom was two years after that.

Commodities have been going down for five years now. Long enough?

If you find yourself on the wrong side of the trade, cut your losses — it could have years to run.

If you find yourself on the right side of the trade… it could have years to run.

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