By Andrey Dashkov, analyst, Casey Research
What I’ll share with you could get me in trouble…
This kind of recommendation is something we reserve for our paid subscribers.
But 2022 has been a wild ride.
There’s been too much pain in the markets.
So I want to help you navigate whatever comes next year…
Because everything is hard to predict.
It’s everywhere, and it comes in all shapes and sizes.
Today, let’s make sure that your portfolio is well-guarded against the “unknown unknowns,” “Black Swans,” bear markets, and other unpleasant situations…
#1: Use Position Limits
It can be difficult to not bet everything on an idea you’re excited about.
But don’t mix high conviction and going all-in.
If you like an investment and think it fits you, great. That’s what conviction is for: so you can explain to yourself why you’re putting hard-earned money into a stock or another asset.
But how much you invest is a different question. You need to decide for yourself.
A good rule of thumb is to think about what could happen if this investment goes to zero.
Will your portfolio suffer a loss that you’ll never be able to recover from? Will you need to put off your retirement by several years?
If that’s the case, be careful. In our publications we often say, “Never bet more than you can afford to lose on any one position.”
That’s basic risk management. That’s how you avoid your own personal “FTX moment.”
#2: Use Stop Losses
Sometimes, the market moves against you for no apparent reason. That’s normal.
Your thesis might be correct, your due diligence is solid, but an asset you put your money into just tanks.
That’s why you should use stop-loss orders to limit your downside.
As a reminder, a stop-loss order is a “sell” order you enter into your brokerage system when buying a stock. You tell your broker to automatically liquidate a position when its value crosses a threshold. For example, you can tell your broker to sell a position if it drops by 20%. By doing that, you limit your loss to 20%.
You’ll sleep much better knowing that you have stop-losses in place.
Trailing stop losses are even better. They are more flexible.
A trailing stop-loss is executed based not on the initial purchase price, but on the highest price your position traded at after you opened it. If it moves up 25% and then drops by 20%, your 20% trailing stop-loss order will be executed. But instead of taking a 20% loss, you will be even.
In our paid-up publications, we also provide stop-loss guidance to protect your portfolio on the downside. Because these “irrational” drops just happen.
So when a stop-loss order is triggered, don’t think twice about it. Maybe you’ll want to go back to this asset and buy it again when it drops lower and becomes a bargain. But in the meantime, take a break and have another look at your watchlist… and read what our experts say about the market.
#3: Take “Casey Free Rides”
Lastly, we recommend selling half of your position if an investment appreciates by 100%. It helps you get your investment back and keep the position risk-free.
Whatever happens next, you’re playing with house money.
Yes, if you sell half and your investment continues soaring, you’ll make less money than if you held on to your whole position.
That’s the price of sleeping well at night. It’s worth it.
Regardless of where the markets go next, you need to take care of your emotional well-being as well as your financial one. They are related, and we hope that 2023 brings you wellness and financial security.
Analyst, Casey Research