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A Basic Idea Very Few Traders Really Understand

By Amber Lee Mason, editor, DailyWealth Trader
Monday, October 13, 2014

The U.S. dollar just made an extreme move...
 
And it triggered a series of big changes in many major asset classes.
 
If you were prepared with our "catastrophe-prevention plan," you're doing just fine. If not, there's something very important... and very basic... you need to understand...
 
There are two sides to every price.
 
My colleague Brian Hunt explains it this way: "On one side, you have the product, service, or asset being measured. On the other side, you have your 'measuring unit,' like dollars..."
 
To understand what's really happening when prices move, you need to understand what's changing on both sides of the trade. Either the product, service, or asset has changed in value... or the "measuring unit" has.
 
When the measuring unit "zigs," other assets "zag." That "zig-zag" action is the idea behind our "catastrophe-prevention plan." You want to spread your assets around so that when one drops, another will rise.
 
If you own assets that move with the dollar – like government bonds – and assets that often move opposite the dollar – like stocks and commodities – your portfolio is protected from extreme moves either way. And as I said, the dollar just made an extreme move.
 
From the end of June through early October, the U.S. dollar index – which measures the value of the dollar against a basket of other currencies – shot up 8.4%. That's an enormous increase for a major currency.
 
 
If you were holding U.S. dollars as your cash allocation, you just made a quick gain. But because there are two sides to every price, the value of many other assets fell...
 
Gold was down 10% in dollar terms... Silver was down 20%... Copper was down 5%... Oil was down 15%... You get the idea. These commodities are all cheaper relative to the U.S. dollar. You can see it in the chart of the benchmark CRB commodity index below.
 
 
But as commodities fell, other assets remained flat or moved up.
 
Let's start by looking at stocks... The benchmark S&P 500 index was down a little... But the value of stocks more or less kept pace with the value of the dollar.
 
 
In the meantime, Treasurys moved up. The price of treasury-bond fund TLT just hit a new high. Treasurys are loans made in dollars. If the dollar gets more valuable, the value of the loan increases.
 
 
Growth Stock Wire readers who took my advice to buy TLT in May are up more than 7%. (My DailyWealth Trader readers are up around 19% on this idea with UBT, a double-long Treasury fund.)
 
Municipal bonds have also seen prices rise. DailyWealth Trader readers own shares of the municipal-bond fund NIO... And we've been collecting big, monthly, tax-free interest payments on those shares. Including the cash payouts, NIO is up around 4% since June 30.
 
Of course, other factors besides the value of the dollar come into play in all of these markets (interest rates, economic growth, sentiment, and so on). But we know there are two sides to every price. We know that a "zig" in one market often corresponds with a "zag" in another...
 
And that's exactly what will happen when the dollar falls.
 
As my colleague Jeff Clark recently told you, the dollar IS going to break down... it can't go up forever.
 
When that happens, commodities like gold, silver, copper, and oil will soar as they become more expensive relative to the U.S. dollar. Stock prices are harder to predict. But if the dollar falls, bond prices will fall. As the dollar gets less valuable, the value of these loans will decrease.
 
No matter what happens, you can do well and keep your money safe with our catastrophe-prevention plan: a portfolio that includes many different assets.
 
The "right" balance is different for everyone. But here's what a sensible portfolio could look like:
 
•   10% precious metals
•   20% cash
•   20% real estate
•   20% bonds
•   30% stocks

If you haven't already taken a close look at where you've stashed your wealth, you should do it today.
 
Over the last two months, folks who had money spread around among many different assets weathered conditions many other investors found extraordinarily difficult. And they'll continue to weather them in the months and years ahead – the market always experiences "difficult" periods from time to time.
 
If you've suffered painful losses over the last couple months, it's never too late to start following our catastrophe-prevention plan.
 
Good trading,
 
Amber Lee Mason




Further Reading:

Amber says that in the market, we're often our own "worst enemies." The average investor's annual returns are "way on the losing end, past even inflation." So what can you do to be better than average? Find out here.
 
Amber has one other simple idea you can add to your "trader's toolbox" today to dramatically increase your odds of success... Learn what it is right here.

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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1928.05 0.0% +13.9%
Oil (USO) 32.41 +0.9% -12.6%
Gold (GLD) 117.50 -0.1% -5.5%
Silver (SLV) 16.62 +0.0% -20.2%
U.S. Dollar 85.86 +0.4% +6.7%
Euro 1.26 -0.7% -6.8%
Volatility (^VIX) 18.73 -0.2% +13.7%
Gold Stocks (^HUI) 193.25 -0.2% -11.1%
10-Year Yield 2.31 -0.9% -13.8%

From The Crux
World ETFs
Symbol Price
Change
52-Wk
India (IFN) 26.15 -0.7% +33.8%
USA (SPY) 192.76 +0.0% +16.2%
Israel (ISL) 16.98 -0.3% +9.3%
Taiwan (EWT) 14.98 -2.0% +4.9%
Canada (EWC) 29.52 -0.7% +6.2%
China (FXI) 37.98 -1.0% +1.5%
S. Africa (EZA) 63.35 -1.2% -0.4%
Singapore (EWS) 13.15 -0.9% +0.3%
Lat.America (ILF) 37.73 -1.7% -1.2%
Japan (EWJ) 11.11 -0.6% -5.5%
S. Korea (EWY) 56.81 -1.4% -9.2%
Russia (TRF) 11.98 -1.5% -20.8%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 45.20 -0.1% +32.7%
Health Care (IYH) 133.67 +0.5% +26.3%
Semis (PSI) 20.27 -6.5% +16.4%
Big Tech (QQQ) 95.80 -1.1% +23.7%
Transportation (IYT) 143.23 -0.3% +22.2%
Utilities (XLU) 43.22 +1.2% +18.1%
Real Estate (IYR) 71.09 +0.8% +14.3%
Defense (PPA) 30.87 -0.2% +12.7%
Financials (IYF) 82.74 +0.4% +13.2%
Consumer Svcs (IYC) 122.51 +0.5% +12.6%
Basic Mat (IYM) 80.63 -0.6% +9.9%
Industrials (IYJ) 96.75 -0.6% +8.1%
Insurance (IAK) 45.81 -0.1% +7.1%
Software (PSJ) 34.32 -1.3% +5.5%
Telecom (IYZ) 28.60 -0.5% +5.2%
Media (PBS) 23.89 -0.8% +3.4%
Water (PHO) 23.96 -0.1% +2.1%
Construction (PKB) 19.82 -0.5% -1.7%
Retail (PMR) 33.07 +1.0% +0.2%
Alt. Energy (PBW) 5.57 -1.6% -11.2%