Monday, June 15, 2015
Lots of investors have an important question on their minds right now...
"Should I be worried about a crash?"
The stock market has gone up six years in a row... It has never gone up seven years in a row.
Europe, Japan, and the U.S. have mountains of debt that seemingly can't be paid back with sound money... And the world economy is struggling to move forward.
So should you be worried?
YES... if that's what it takes for you to put a "catastrophe-prevention plan" in place...
We think this bull market has more room to run. Some stocks are expensive. But there are still some great values... especially considering the rock-bottom interest rates folks earn at the bank or in bonds. Also, investors aren't overly optimistic today, which is a good thing for stocks. And one of the best indicators we know of – the long-term trend – is still pointing higher.
But the bull market will end at some point... And that end could come suddenly. So you need to be prepared in advance, no matter your current outlook.
You need to have a catastrophe-prevention plan...
A catastrophe-prevention plan is a combination of three powerful wealth-protection ideas that dramatically reduces your risk in the market. Implementing these ideas allows you to continue to stay in this bull market... but it will help protect you when the boom eventually turns to bust.
The first part of our plan is asset allocation. The idea here is to spread your wealth around in different asset classes, like stocks, bonds, cash, real estate, and precious metals. As one asset "zigs," others will often "zag." So it's unlikely your overall wealth will take a big hit, even if one or two asset classes crash.
In past essays, we've suggested general guidelines for what percentages of your wealth you might want to allocate to different asset classes. (Everyone has different goals, but here's a starting point.)
If you don't know how much to hold in stocks, use the "sleep at night" strategy. If you worry about the next crash every night, you have too much money in stocks. Sell some of your holdings until you get to your comfort level... where you can sleep well at night without worrying.
The next part of our catastrophe-prevention plan is position sizing. For each stock position you own, keep your risk to a level that makes sense. Even the best stock pickers in the world get calls wrong. You don't want to lose 10% of your wealth if an idea doesn't go as planned. So before you buy any stock, plan your position size based on the risk you're willing to take. (Learn more about this idea here.)
In order to determine the risk in a position, you need to use stop losses. A stop loss is the point where you say, "I'm wrong... It's time to cut my losses and move on." This is the best way to follow the golden rule of trading: "Cut your losers and let your winners ride."
In short, a stop loss is a predetermined price at which you will exit a stock holding. It ensures you get out of a trade before any major crash... And it ensures you have plenty of cash to put back into stocks when you're ready. (Learn more about stop losses here.)
Stansberry Research readers have made great money in the market over the past few years. And we think the bull market will continue running higher...
But make sure you have a catastrophe-prevention plan in place anyway. If you don't, take some time this week to work on it. Avoiding catastrophe in the short term is the best way for you to grow your wealth over the long term.
Brian Hunt and Ben Morris
"Most investors will fail," Porter Stansberry writes. "This is the most important information I can possibly give you." To be successful, Porter says you need to understand why investors fail and how they fail. Learn the only chance you've got to be a successful investor.
Dr. David "Doc" Eifrig has shown readers how powerful it can be to hold "chaos hedges" – like gold – in your portfolio... "When investors get nervous about bad economic news... debt crises in Europe... 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.
Insurance stocks are in a long-term uptrend... sector fund IAK hits a seven-year high.
Fertilizer giant Potash drops 18% over the past four months.
Retailer Macy's rises 22% over the past year.
Real estate stocks struggle in 2015... sector fund IYR drops double digits since late January.