Ask Doc Half of all Americans are ruining their financial future...
Over the past few years, various surveys found more than half of Americans own zero shares of stock... even in retirement accounts. That means more than 50% of folks completely missed out on the longest bull market we've ever seen.
Not investing is one of the biggest mistakes you can make if you want a wealthy retirement.
Some of those folks probably have excuses. Maybe they lost a job... they don't trust Wall Street... or money is tight. Or maybe it's just too hard to figure out the brokerage forms to get started.
These excuses are all based on fear.
When it comes to investing, fear prevents most people from starting – whether it's fear of losing money or fear stemming from ignorance.
It's common investor behavior to freeze in the face of fear. A tiny part of your brain called the amygdala kicks in whenever there's a perceived threat.
The amygdala makes us want to avoid risk.
Money, in today's society, represents a sense of security. We need money in order to obtain what we need to survive... food, shelter, and medicine. Any threat of losing money can trigger the amygdala to kick into full force.
But that fear is dangerous to your investments. The "safest" thing for your amygdala is to follow the crowd... to stay out of the market until you hear that everyone is buying in – normally at the top.
When you hear cocktail-party chatter filled with stories of stock victories, that's a classic sign of the end of a bull market and the start of a bear market.
While we haven't seen this sort of mania yet, we might not be far off. But that doesn't mean you don't have time left to profit from the stock market.
During a special event last night, my friend and colleague Steve Sjuggerud detailed the full story on what's happening in the markets right now, what it means for his Melt Up theory, and – most importantly – what it means for your money.
According to Steve, we're entering a period of great risk... and great reward.
Where you end up on that scale is going to depend entirely on the actions you take in the coming days.
Last night, Steve explained exactly what he believes you should do to protect your money right now – and how to put yourself in a position to potentially make bigger gains in a few months than you have at any other time over the last decade.
If you missed it, click here to watch the replay now.
Now, it's time to dig into this week's Q&A... Have a question you want answered? Send it to [email protected].
Q: Hi Doc, it's been pounded into our heads to use our stops/trailing stops when the meltdown arrives. I'm prepared for that and thankful for the information. My question is... do you recommend using our stops with our "forever" stocks as well? Thanks, Doc. – M.B.
A: Trailing stops are vitally important, even if you're buying into a "forever stock." That's because no matter how strong the business is, few stocks truly last forever.
General Electric (GE), General Motors (GM), American International Group (AIG), Eastman Kodak (KODK), and others were considered forever stocks at one point... and if you've held their stock for decades, you've seen your wealth decline dramatically... or even get wiped out.
Before buying any stock, know what your exit strategy will be – typically a stop – and stick to it. It's the best way to keep your losses in check when a stock or the whole market is crashing.
However, with a true forever stock, you don't want to fear drawdowns in price. Some of the best companies saw share prices decline 50% or more after the financial crisis of 2008 to 2009 – which turned out to be a rare wealth-building opportunity. And there's no better example than last spring's COVID-inspired crash.
The key here is determining when a business is truly impaired (because the global trends are changing), or if it's just down over a few quarters of earnings.
So how do you strike the balance? We think if you focus your investment account on 10 or 15 great companies, you can use a broad trailing stop to keep you safe. Most folks don't want to spend the time tracking a dozen different stock prices.
Another thing you can do is outsource the exit strategy to an expert...
Here at Stansberry Research, some of our editors and analysts watch a company's finances to decide when to sell. I wouldn't recommend doing this on your own, but they know how to distinguish between noise in the markets and a genuine problem in the underlying company.
That's what my team and I are doing with our new "Gift of Wealth Portfolio," which is part of my monthly Retirement Millionaire advisory.
We designed this portfolio for folks who have the time to see great companies steadily rise in value over the decades to come – for example, if you're gifting a brokerage account to your child or another young relative.
In this portfolio, we've included just five companies. And given that it's designed to invest small gifts over time, you're not risking as much money from a single struggling company as you would in your retirement portfolio.
This portfolio is a "set it and forget it" approach to wealth-building... If you leave these five stocks alone, odds are they'll rise over the long term – even if they'd trigger a trailing stop or two along their way up. So instead of a formal stop, we'll just check in on how these companies are doing. As long as they're still living up to our investment thesis, we'll keep holding. You can leave the exit strategy in our hands. The Gift of Wealth Portfolio is only available to Retirement Millionaire subscribers. In addition to details about the recommended stocks, our most recent issue also describes how to buy a piece of all five companies for as little as $5. So if you're not a subscriber yet – or you want to gift a subscription to someone you know – click here.
Q: I would like information on some safe places (earning, say, 3% or so) to place cash that I am not comfortable investing in the market. Thanks. – J.C.
A: We've recommended folks hold some of their wealth in cash for a long time. When we say cash, we simply mean all the money you have in savings, checking accounts, certificates of deposits, or U.S. Treasury bills. We consider any investment with one year to maturity or less as cash.
Now, with interest rates practically at 0%, you're not going to become rich sitting in cash. (In fact, the national average for March 2021 is 0.07%.) But cash is safe and will still pay you a small yield... a yield you'll be thankful for when stocks fall – as we suspect they will again in the coming weeks and months. And once markets stabilize, you'll be in a better position to go bargain-hunting if you have plenty of "dry powder."
One of our favorite ways to hold cash right now is through a money-market account. These accounts pay a higher interest rate compared with traditional savings accounts, and your money is insured by the Federal Deposit Insurance Corporation.
Specifically, you can use a cash-like vehicle such as the Fidelity Government Cash Reserves Fund ("FDRXX") to park your money. The current yield isn't much, but it's safe. And over the past three years, FDRXX paid a yield around 1.14%... which, again, is more than most savings accounts.
Q: When establishing stops on covered-call positions, should the stop be placed on the stock, the call, or both? – J.P.
A: Stop losses are an essential part of my options-trading strategy. In my Retirement Trader advisory, I recommend that people set stop losses between 20% and 25%. These are based on the total cost of opening and closing the trade.
Let's take a look at an example... In this case, we'll use a 25% stop loss for a covered call. (For readers who aren't familiar with options trading, a call is a contract to sell stock at a certain price. When you set up a covered call, you're selling someone the right to buy 100 shares of a stock you own.)
Say you sold May $25 covered calls on stock XYZ. You bought shares of XYZ for $25, then collect a premium of $1 for the call option you sold. That means your total outlay – basically what you spend to open the trade – is $24... the $25 stock price minus the $1 you received in call premium.
To figure out the 25% stop limit, take the total outlay and multiply it by 75%.
In this case, the combined value was $24 (cost of the shares minus the premium income)... $24 multiplied by 75% is $18.
Now, because you'll have to buy the call back to close out the trade, you have to take that into your calculation.
Let's say that the option is trading for $0.25. You'd need to spend $0.25 to buy back the option. So following a 25% stop loss, you'd want to close the trade if shares hit $18.25.
What We're Reading...
- Did you miss it? Don't worry about the market crashing.
- Something different: Why birds are disappearing from American skies.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 30, 2021