“When chaos rules, invest in chaos” says The Sovereign Society’s investment director Eric Roseman.

Eric’s chaos portfolio is thriving in the current market volatility. And he says anyone can make huge gains in the coming stock-market rally by applying a simple-to-follow strategy.

Eric’s strategy is four-fold: 1) Hold plenty of cash in FDIC-guaranteed accounts; 2) Use it to buy up distressed assets at multi-year lows; 3) Sell into strength; 4) Invest at least 10% of your portfolio in gold.

This from Eric:

As the global financial landscape changes dramatically over the next several months, you will have to look to alternative investment strategies to produce absolute returns.

It is very likely that we’ll soon see some of the most important changes to existing securities laws and regulations since the Great Depression.

And despite offering great values at these busted levels, stocks won’t secure your retirement over the next few years. Instead, you will have to look to alternative sources of capital gains that can thrive amid total market chaos.

That means placing a portion of your assets into investments that can appreciate even when the markets are in a virtual nosedive.

When Chaos Rules the Marketplace, Invest in Chaos

Last December I introduced a new crisis investing portfolio in The Sovereign Society’s members-only newsletter, The Sovereign Individual called the TSI Chaos Portfolio.

While virtually everything plunged over the last week, the TSI Chaos Portfolio surged upward.

In October, this equally weighted strategy has rocketed 16% compared to a crushing 25% loss for the S&P 500 Index.

Year-to-date, the TSI Chaos Portfolio has soared a cumulative 34% — including dividends — compared to a mind-blowing 43% crash for the S&P 500 Index. In fact, the chaos portfolio is doing so well that I’ll be adding another recommendation in this month’s issue of The Sovereign Individual.

Now to be clear: many of my stock recommendations — and everyone else’s for that matter — have plummeted in value this year. Stop-losses are going off like a pinball machine. Literally, the only strategy thriving in this mess is one based on total chaos.

What makes the Chaos Portfolio thrive is… well, chaos.

A near complete financial system breakdown is exactly what makes this strategy excel. It’s easy to trade, cost-effective and any investor can participate even with a small initial investment.

Chaotic Tendencies

A massive short-term up-crash or spectacular market rally is highly likely at this point. History strongly suggests at least a 20-40% rally lies ahead following a hugely oversold period for common stocks.

Even in the midst of protracted bear markets, stocks can muster up huge rallies.

This occurred on numerous occasions since 1929 with stocks surging from 1934 to 1936 before declining again. Stocks also posted an intermittent 40% gain in the 1968 to 1972 period while also recording impressive annual returns in the post-1974 period before finally bottoming in 1982.

I’m expecting a massive stock market up-crash to happen at any time as governments work overtime to reassure investors and inject additional doses of liquidity into inter-bank lending markets. Confidence will return to capital markets, if only for a while.

Many companies with strong balance sheets and strong cash flows have been trashed. In fact, US blue-chip stocks harbor more than US$650 billion in cash right now. In some cases, they are probably more solvent than most governments and municipalities.

For investors with a five-year investment horizon or more, this is exactly the time to start cherry-picking some of the best names in the United States. I would still avoid the financials. But many superb companies with strong global brands and no need to secure short-term financing are selling at five-year lows. Many stocks also pay high dividends.

What Should I Be Doing Right Now?

Regardless of your age or risk tolerance, you should be at least 50% in cash or cash equivalents now. Make sure your funds are safe or deposited in banks that are FDIC-protected. Cash is vital because it will allow you to buy hugely distressed assets in stocks and credit markets over the next 12-24 months.

Alternatively, short-term Treasury bonds are a good safe-haven from the carnage and uncertainty affecting the global financial system. If you buy a money-market fund then make sure it’s a “government” or “Treasury” designated product.

As far as stocks go, just don’t panic. The worst possible thing you can do in this dangerous environment is panic.

If you own stocks that you’d like to sell, you should wait for a rally. Stocks won’t plunge forever. As the next rally unfolds, use that opportunity to sell stocks you don’t want to own. But again, if you have at least a five-year investment horizon, you can start nibbling at select blue-chips now.

The time to buy these great distressed companies is when prices are at multi-year lows, not when stocks trade near or at all-time highs.

Golden Opportunities

And don’t forget about gold. I suspect global central banks have been suppressing the price of gold in this panic. Gold supplies are razor thin and most investors can’t access coins or bars in the United States or Europe.

Global gold production in 2008 is basically flat. No new mine production is expected until at least mid-2009. I can’t believe gold isn’t trading north of US$1,500 right now. But before this crisis is finally laid to rest, I think gold prices will fetch more than US$2,000 an ounce.

That being said, I do expect gold prices to decline following any concerted policy announcement from the G-7 industrialized countries to arrest the ongoing crisis. And that’s when I plan on adding to my gold positions.

Gold should represent at least 10% of your portfolio. Any intermittent stock market rally accompanied by a relaxation of credit stress should be viewed as an opportunity to buy gold and other chaos-related investments that can thrive when uncertainty rules.

A big bear market stock market rally is highly likely. As it progresses, sell into strength and buy into chaos.

Source: How to Thrive On Chaos