The Big Hiccup

The stock market was already falling last week when on Thursday, May 6, 2010, the market did a free fall of 1,000 points on the Dow Jones Industrial Average for about 20 minutes before recovering with a loss for the day of almost 400 points. That drop rattled investors worldwide because they have never seen that happen before. Some people claim that it was a trader who typed in a “Sell Order” for one Billion shares instead of one Million in a Procter and Gamble’s trade. Some say that it was a lack of “Buy Orders” for almost two minutes in Procter and Gamble’s stock. Others say that it was an imbalance of orders between the NYSE and NASDAQ in Procter and Gamble’s orders. The fact of the matter is that no one really knows what happened. But they will come out with some excuse to settle the fears of the financial community.

Congress, the SEC, and the Treasury Department are in the middle of a major rewrite of the Securities Industry Laws. Senator Charles Schumer, Democrat from New York will probably get his way, calling for new system wide circuit breakers to prevent such a “Free Fall” in individual stocks from triggering “Exchange Landslides” again.

It is situations like these that make my investment strategy look good. I tell investors to minimize risk while maximizing profits by using non-investment grade Corporate Bonds as the major percentage of their portfolio. My portfolio is made up of 95% Junk Bonds, 4% Stock, and 1% Cash. Between May 1 and May 8, my portfolio fell from 20.05% YTD Profits to 17.54% YTD Profits or down 2.51%. The Dow was down 5.71% for the week, 11,008.61 to 10,380.43. For the year, I was still up 17.54% while the Dow was down .46% YTD.

That means that people who had all their money in the stock market went no place or lost money in the last 5 months while I gained. The reason, I minimize my losses by keeping a high percentage of my portfolio in Junk Bonds. Most people try to make a killing in the stock market by speculating or gambling with mutual funds (stocks or bond funds) and with individual stocks with nearly 100% of their money. This is why they have poor results.

It does not matter if you invest in stock funds or bond funds. They are both speculative because they do not mature like bonds. The maturity is what makes individual Corporate Bonds safe because either the underlying company goes out of business or they pay you. Even if they go out of business, you still have first pick of the assets when it is sold off and the cash distributed.