Just as running uphill is more exhausting than cruising downhill, making back all the money lost is tougher than losing money.

Looking back in hindsight, it doesn’t really matter why the S&P 500 (AMEX: SPY) and Dow Jones (AMEX: DIA) lost half of their value. Fact is, they did. Nevertheless, there are valuable lessons to be learned (more about that later).

What does matter, is finding a way to stop the bleeding, regain your footing and get your portfolio back on track.

Even though it sounds simple, this may seem like a daunting task. Nevertheless, don’t allow yourself to be discouraged to the point where you simply don’t open your account statements anymore.

Quite frankly, getting your nest-egg back on track won’t be easy. It will take more work than just waiting for the Dow to climb back up to 14,000. But even though the economic outlook is less than rosy and Dow 2,000 is closer than Dow 14,000, there are strategies which will help you to grow your portfolio.

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In fact, if done correctly, you can turn the worsening economy and a soft stock market to your advantage. Let me explain how and why:

Default growth or “easy money”

It is a common misconception that a 50% loss requires a 50% gain to get back even. Unfortunately, mathematics don’t work this way. A 50% loss requires you to double your money (100% gain) just to get back to square one. Only few investors have been able to double their money in less than 10 years.

In the year 2000, when the technology sector (NYSEArca: XLK) and Nasdaq (Nasdaq: QQQQ) lost some 40%, at least four other industry sectors, like the Financial Select Sector SPDRs (NYSEArca: XLF) and Consumer Staples Select Sector SPDRs (NYSEArca: XLP), had gang buster years.

In the year 2008, all asset classes dropped like a rock. Not only did equities plunge, real estate (NYSEArca: IYR) also continued their downtrend which was kicked off in 2007. Broad bond ETFs like the iShares Aggregate Bond ETF (NYSEArca: AGG) struggled to hold their value while corporate bonds represented by the iShares Investment Grade Bond ETF ( NYSEArca: LQD) lost some 15%.

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Even though oil doesn’t fit the classic interpretation of a bubble, oil prices dropped from $147 to as low as $30 a barrel. The iShares Silver Trust (NYSEArca: SLV) at one point lost over half of its value while the Gold Trust (NYSEArca: GLD) is the only commodity showing resistance against the “red across the board trend”.

The subtle message to be drawn from the above numbers is that nearly everything has gone on sale. From equities to commodities and flat screen TVs to cars. Notwithstanding counter trend rallies (as the one we are expecting), this trend will continue.

If you can manage to protect your wealth (not even considering a grow factor) you will by default increase your purchasing power. Over the next few years, deflation will trump inflation. Why? Because wealth is being destroyed much faster than even the government can print money. Since the bear market started, some $22 trillion of real estate and stock market wealth have been destroyed while the Fed’s balance sheet has increased by “only” a few trillion.

If one dollar will go further even with a stagnant portfolio, imagine how your purchasing power will increase with a growing portfolio.

Growth strategies

After a 50% plunge, many investors are seriously considering to throw in the towel and protect what’s left. Fortunately, with the emergency of ETFs came the Main Street tools to profit in any market. An abundance of tools is available if you can discern the markets trend (more about that later).

Short ETFs have proved to be a significant profit center. We recommended short ETFs from September through November 2008 and again starting on January 2nd 2009. ETFs like the UltraShort S&P 500 ProShares (NYSEArca: SDS), UltraShort  Dow Jones (NYSEArca: DXD) and UltraShort Financial ProShares (NYSEArca: SKF) are up between 40 – 100% since we recommended them.

Short ETFs, in particular leveraged short ETFs are powerful tools and just like power tools can really move a project along if used correctly or cause damage if abused. A basic understanding of the markets general direction is required before “plugging in” short ETFs. This is actually not as hard as it may sound, however you almost have to distance yourself from the readily available news sources.

Those who don’t learn from history …

Conflicts of interest for example, might restrict certain news stations to provide 100% objective coverage. Just last week we highlighted some of Jim Cramer’s most horrendous recommendations (read related article here). In a recent interview, Jim Cramer gave us a glimpse into (what might be) CNBC’s predicament.

He complained how the executives of Bear Stearns, Merrill Lynch and AIG (NYSE: AIG) would lie to his face. Good financial reporting and cross checking of the facts were neglected, allowing CEOs to spread erroneously optimistic reports causing investors to buy shares of falling companies.

Fed Chairman Bernanke and Treasury Secretary Paulson on the other hand, Jim Cramer called liars. How come corporate executives got away with lying while Bernanke and Paulson were considered liars? One of the reasons seems to be that financial institutions fund news networks with their advertising dollars. How about those AIG commercials on the financial news? Who can afford to bite the hand that feeds them?

Unfortunately, investors are more than just innocent bystanders, they are the victims.

The ETF Profit Strategy Newsletter on the other hand is a breath of fresh air when it comes to reliable investment guidance.  Below are excerpts from recent recommendations:

September 15, 2008 (Dow: 10,917): “Financials – a downward spiral with no stop loss provision. The perception that your money is safe keeps banks alive. Watch out if that perception changes”.

October 2, 2008 (Dow: 10,482): “The bailout will fail!”

October 15, 2008 (Dow: 8,577): “The Dow might see a trade-able bottom below 7,500 followed by a November/December rally.”

December 14, 2008 (Dow: 8,564): “Range-bound trading, as we've seen over the past several weeks, grinds and tests the patience of investors. More importantly, it gives the stock market a chance to calm extreme levels of investors' pessimism. Conversely, optimistic sentiment, which should be more visible above Dow 9,000, gives way to further declines. These should draw the indexes close to or below their November 21st lows of 7,445 for the Dow and 740 for the S&P.”

February 13, 2009 (Dow: 7,850): “The best target for a temporary low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600”.



In summary, there are three options:
1) stick your head in the sand and wait (a long time) for Dow 14,000
2) cash out
3) take the bull by the horns and profit by using smart ETF profit strategies.

A look at reliable long term indicators shows that the markets general direction (notwithstanding counter trend rallies) remains down. Current P/E ratios, dividend yields and consumer sentiments are far away from levels usually seen at a market bottom.

Indicative of their implications, we’ve called the four most reliable long-term indicators the “Four Horsemen”. The March issue of the ETF Profit Strategy Newsletter features a detailed analysis of the Four Horsemen along with a short, mid and long-term outlook, including specific target levels and ETF profit strategies. You will also find out if you’ve just missed the bottom. It’s time to resurrect your portfolio!

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