Sometimes crisis is an opportunity. Sometimes it’s just destruction. And if you are wrong or too early, you can end up a loser.
The coronavirus has shut down wide swaths of the global economy. It’s too soon to know exactly what kind of crisis it is – opportunity or pure destruction.
Everybody wants answers today. We all find ourselves scrolling endlessly on our phones or perpetually watching cable news, trying to glean any bit of information that will help us see the future.
We know this is futile. So instead, let’s step back from the crisis… away from the news, away from the virus, and out of the current moment.
It’s a picture of how to invest for freedom and calm… and get through our current challenges.
When people think of Wall Street, they often picture a flurry of floor traders in color-coded vests barking bids at one another. Or they think of riding a hot tip they got from a guy who “knows something” and seeing an immediate windfall.
That’s not how it works. Or rather, that’s not how it should work.
You don’t want excitement in your investment accounts. You don’t want risk and drama and hours of analysis. (We love doing the analysis at Stansberry Research, but you don’t want it to be your full-time job.)
We want to put our money to work for us. And we want a dependable employee who gets the job done with little fuss.
After all, we’ve got enough to worry about in times of crisis. We want our wealth to be a buffer against that, not another thing to worry about.
We want to invest for calm and freedom. And you need to do two things to make that happen…
First, you need to plan ahead and manage your risk.
You’ve probably seen these ideas often in DailyWealth: Buy the stocks of high-quality businesses… Diversify with low-cost funds… Allocate to stocks, bonds, and other real assets… Limit your speculations to sizes you can handle.
These ideas aren’t original to us. They can be dull, and they can get repetitive.
But every panicked investor in March found himself wishing he had done those things three months ahead of time. The simple work of building a sturdy portfolio pays off in a crisis… even if it doesn’t excite you in a boom.
The second thing you need to do to invest for calm and freedom involves your mentality…
You need to accept that stocks are volatile. You see, stocks build wealth over time. But they don’t do it in a straight line. If you want the money, you’ve got to be willing to walk the path.
The market has returned about 7.7% a year since 1928… But it certainly didn’t return that each and every year. Down years of 10%, 15%, or 20% happen with regularity. Take a look…
Drawdowns in stocks happen. It’s the cost of admission.
Don’t fool yourself into thinking you can avoid all of them when they hit. Crises like these are unpredictable. And if you sell at every sign of fear, you end up selling little dips, buying back in at a higher price, and missing the good parts of the market.
To quote legendary investor Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
So this second step toward calm and freedom is a mental one… or one of temperament. You need to accept that your stock portfolio will give you a scare every so often. After all, history has shown us that stocks eventually come back.
At what point on the chart below was it a bad time to buy or hold stocks?
We don’t know exactly what will happen with the coronavirus, how long we’ll be isolated, or how long our economy will be shut down. We will see more bankruptcies, business closures, and economic pain. We could be entering a recession… maybe even a depression.
But this will not end society as we know it. During the financial crisis of 2008, the banking system nearly collapsed. The risk of ending the current economic regime and starting a new one was far more serious back then.
This time, the economy will come back… and the stock market will, too.
This acceptance of stock risk is embedded in our 25% stop loss strategy. We buy businesses we want to hold for a long time. And we commit to selling when the stock falls by a certain amount – and not before.
My friend and colleague Steve Sjuggerud likes to use trailing stops, which follow stock prices as they move higher. That way, you would sell when the stock falls 25% from its highs.
If you’re wrong and the stock falls 25%… you’ll cut your losses and move on to another opportunity.
If you’re right, the stock will rise. And as it rises, your wealth will grow.
Now, you can’t hold just any stock for the long term. Some businesses will be permanently impaired by the crisis.
Rather, you should only do this with strong businesses and companies with the balance sheets to survive what lies ahead.
My advice is to own companies whose business models you could explain to a complete stranger. You should also own companies with lots of cash – businesses that can survive a recession and even gain market share as competitors struggle.
This is how you invest for freedom and calm during a crisis… and sleep well at night, knowing you’re on the steady path to building wealth.
Here’s to our health, wealth, and a great retirement,
— Dr. David Eifrig
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Source: Daily Wealth