Editor’s note: We know it’s tough to stay focused on your financial goals right now. The coronavirus pandemic grows every day, and the market whipsaws off of every headline about the outbreak.
But while we hope you’re taking steps to protect your health, it’s also important to safeguard your portfolio during these times. That’s why this week at the Dispatch, our experts at Casey Research are sharing their best advice for handling the volatility we’re seeing today… so that you’re well-equipped to withstand whatever this market throws at you next.
Today, we hear from Strategic Trader editor E.B. Tucker, who shares four important questions to ask yourself right now. They might not have easy answers… but answering them honestly will help you sleep easier at night – and prepare you to take advantage of the volatility ahead…
By E.B. Tucker, editor, Strategic Trader
When the 11-year bull market ended two weeks ago, it was the fastest swing from a bull market to a bear market in history.
It took many people by surprise. But not my readers.
Last August, we said that after 10 years of excitement, the bull market would eventually feel gravity.
That said, we knew it wasn’t a time to be pouring money into the broad stock market. Companies like Facebook, Amazon, and even Tesla were more than fully valued. That means they weren’t compelling investment opportunities.
Worse yet, those companies make up a large part of index funds favored by most American investors. When you rely on a handful of companies to lift the entire stock market, that’s a recipe for disaster.
Since reaching a high on February 12, the Dow Jones Industrial Average is off 32%. The S&P 500 is down 29% from its high on February 19.
It’s been brutal. But that doesn’t mean selling won’t continue.
We might see a “bear market rally.” But this violent surge higher is often a mirage. It can suck investors back in, giving the impression that all is well just before the market takes another leg down.
The stock market prices the future earning power of companies. Current prices suggest a tremendous economic slowdown dead ahead. The truth is, nobody knows when business will resume. That makes revenue and earnings forecasting a mere guess.
Plenty of investors, possibly including you, are pretty scared right now. That’s understandable.
But if you’re worried about the stock market, you can take steps to protect yourself by asking these questions… and answering honestly.
Look, we’ve been doing this for a long time.
I (E.B.) co-managed an investment fund focused on precious metals stocks. We managed our way through the 2012-2013 downdraft in that market. Today, I sit on the board of a fast-growing gold royalty company. And on top of that, I have more than two decades of active experience in the market.
When friends and colleagues call me in distress about what’s going on with the financial fallout from the coronavirus panic, I ask them these questions.
You can help yourself by answering them right now.
1. Do you have too much money in one place?
Speculative investments can be lucrative, but they deserve a proportionate amount of capital.
For example, at my Strategic Trader advisory, we recommend stock warrants as opportunities arise.
If you’re not familiar with them, stock warrants are a great way to make asymmetric bets on stocks.
Warrants give holders the right, but not the obligation, to buy stock directly from a company in the future. And they often cost less than a dollar. This means that warrant holders pay pennies for the right to buy a stock, but they don’t fork over the cash until they decide to buy it.
In other words, warrants have huge upside potential and limited downside risk.
For example, last month, my Strategic Trader subscribers cashed in on a 1,031% gain on a warrant we had been holding for less than a year.
And you didn’t have to wager a ton of money to see an outstanding return. When we opened that position, the warrant cost less than 20 cents. And it continued to trade within our buy range for the first six months. Investing just $1,000 in that warrant would’ve turned into $11,310. (You can find out more about gaining access to Strategic Trader, and our entire portfolio of warrants, by going here.)
But that’s just one position. Seasoned investors know that keeping a bullpen of interesting speculative holdings can really move the needle on their wealth.
Meanwhile, novice investors get excited about one speculation and swing for the fences. When the inevitable market correction comes, it takes them out at the knees.
The cardinal rule is to never bet more than you can afford to lose.
We can’t stress this enough. If you’re losing sleep at night worrying about your speculative portfolio, you have too much on the line.
2. Do you use trailing stop loss alerts?
At my other advisory, Strategic Investor, we use trailing stop loss alerts in our core portfolio to protect us from market turmoil.
Trailing stop loss alerts track a stock higher. For example, a 25% trailing stop loss on a $10 stock triggers on a close below $7.50. If the stock rises to $20, the trailing stop loss alert rises to $15 (a 25% decline from $20). This differs from traditional stop loss orders, which would sit at $7.50 even if the stock rises to higher levels.
Recently, we sold several stocks in Strategic Investor that triggered trailing stop loss alerts. But even though the stocks were falling, we largely booked profits in these trades. That means we protected profits and avoided further market turmoil by adhering to our trailing stop loss policy.
By using trailing stop loss alerts, you’ll save yourself from unnecessary worry.
3. How much cash do you have?
If you’re fully invested in stocks and other risky bets, low prices don’t help you at all.
But if you have cash… a market downturn is a tremendous buying opportunity… although it can be incredibly scary.
In August 2008, something about the market didn’t feel right to me. By early September, it seemed like the financial world was about to crack. So I called my broker on a Monday morning and told him to sell some of my largest position at the time, insurance and annuity firm Lincoln National.
We got $55 a share on that sale. It wouldn’t see that price again for years. It fell to $5 a share within 60 days.
With the cash I acquired from selling, I bought all the shares back, and then some, for $9. I also bought gold for $720 an ounce, silver for $9 an ounce, and a bevy of high-yield stocks.
By the following summer, I sat on what I considered tremendous profits at the time. That turned into the fuel I needed to take advantage of the once-in-a-lifetime real estate depression.
My point here is, having even a modest amount of cash during a market correction can sometimes turn panic into elation.
Interestingly, Lincoln National fell 72% over the past 26 days. That’s far worse than the overall market. It shows sitting blindly in stocks during a downturn can lead to a near-wipeout.
4. Do you trade on margin?
In other words, do you invest borrowed cash?
If you do, and you’re a novice investor, it’s time to question that decision.
Owning an investment outright does limit your upside potential compared to those who borrow to increase their exposure.
However, in a downturn, owning your investments means having the option to sell when you want to, not when the margin clerk seizes control of your account. If you’ve been on the other end of the phone for a margin call, you know the feeling…. It’s terrible. It’s also avoidable.
If you’re a professional trader, it may be unavoidable. If you’re not, rethink your decision to borrow against your stock holdings now.
What you may not realize is, debt restricts your ability to think clearly. That’s the most valuable skill an investor has. It’s the ultimate edge. Don’t let the quest for more money limit that edge.
We hope these questions help you really consider your money and the market. Your goal in answering them should be to clear your head and right your thinking. Over the long term, that’s what leads to market success.
Editor, Strategic Trader
P.S. The Casey Research team aren’t the only ones offering help to our readers during these uncertain times. Our colleagues at Legacy Research have launched a special series of their Daily Cut newsletter called Market Mission Control.
It’s a great resource for readers looking for timely insights from Legacy’s top analysts, local updates from dedicated Legacy readers, and valuable takeaways on where to put your money in this volatile time. (In fact, I shared my thoughts on gold’s performance during this crash – and why I expect it to soar much higher – in a recent issue.)
Just go right here to sign up. It’s completely free.