Monday, January 27, 2014
After the recent selloff in stocks, folks are wondering if this is the beginning of a deeper market correction.
The big question they're asking is, "What should I do now?"
Markets can't go up in a straight line forever. They're like sprinters... They need to "catch their breath" from time to time. So I wouldn't be surprised to see the S&P 500 fall another 5% or even 10% from here...
But regular readers of my DailyWealth Trader service know I don't try to predict exact tops in the market. Instead, I encourage folks to use the tools available to limit risk... like position sizing and stop losses.
But there's an even "bigger picture" strategy you can use to ensure your wealth will survive a crash...
Asset allocation is how you spread your wealth among several different assets – stocks, bonds, real estate, cash, and "crisis hedges," like gold and silver.
If you master smart asset allocation, you're very likely to have a long and successful investment career. If you DON'T master smart asset allocation, it's very likely that you'll place far too much money into one risky asset... and then suffer a catastrophic loss of wealth. For example, investors who held a huge chunk of their wealth in tech stocks back in 2000 suffered tremendous financial and psychological damage. The same with real estate in 2007.
Our favorite writer on this idea is Dr. David Eifrig. Doc writes the excellent Retirement Trader, Retirement Millionaire, and Income Intelligence newsletters. He's a mentor and a friend. And one of the most important things he teaches his readers is proper asset allocation.
I can't say if this portfolio is right for you and your goals...
But I can say you should make sure your allocation to stocks is sized so that if you hit your stops on several – or even all – of your positions, you still won't lose too large a portion of your net worth.
For example, let's say you have 100% of your wealth invested in the market and you maintain 15% trailing stops. If stocks drop straight down from here, you'll lose 15% of your net worth. That's a big slug. And it will take a long time to recover.
On the other hand, if you have 40% of your wealth invested in the market, a 15% stop loss will get you out after you've lost only 6% of your net worth. That's a much easier hit to take. And it'll be much easier to get back up to even.
Plus, while stocks drop, other assets – like bonds, cash, and crisis hedges – could gain in value. That will help offset your losses.
Another benefit of a reasonable allocation in stocks is that you can leave your money in the market – to benefit if prices continue higher – and still "sleep at night." You know not all your money is at risk.
While I wouldn't be surprised to see stocks correct further, I believe they will ultimately continue higher from here. But I can't know the future. That's why I recommend you crash-proof your stock portfolio with position sizing and trailing stops... and crash-proof your wealth with intelligent asset allocation.
Amber Lee Mason
If you're looking for a way to crash-proof your wealth from a stock correction, Doc has shown readers how powerful it can be to hold a portion of their portfolio in precious metals... "When investors get nervous about bad economic news... and the specter of runaway inflation in the United States," he writes, "stocks fall, and gold and silver rise." Learn how Doc protects his wealth with precious metals here and here.
"In a world of 0% interest rates on savings accounts and ultra-low rates on Treasurys, it's hard to prevent your wealth from eroding away," Amber and Brian Hunt write. If you're worried about earning enough to protect against rising inflation, Amber and Brian have a safe, alternative technique for producing 10%-20% yields every year. Click here to learn more.
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