Building Wealth Last week was a wild week in the market...
From Wednesday to Thursday, the Dow Jones Industrial Average fell nearly 1,500 points.
Even though stocks bounced back some on Friday, folks are asking if this is the beginning of the end.
Logically, we know these drops typically come in late-stage bull markets as volatility increases. And as we wrote Friday morning, even with a medium-term view, one day of losses isn't worth fretting over. These types of small corrections aren't rare.
During times like these, it's good to remember our basic principle: Always keep your portfolio sound. Like properly securing your valuables in preparation of a hurricane, make sure your investments can weather the storm.
But we're not there just yet. We believe this is simply a correction. The bull market still has some time to go.
No matter what happens with this market, I know a lot of folks feel the pressure. Stress runs high. Maybe your emotions take over.
Don't let that happen.
Not only will uncontrolled emotions wreck your portfolio, they'll wreck your health too.
Take the latest study from the American Economic Association. I recently wrote about it in my October issue of Retirement Millionaire.
The study focused on stock market fluctuations and health outcomes. And it turns out that changes in your overall wealth directly affect your medical state. Researchers reported that just a 10% change in wealth during a two-year period corresponded with a 2% to 3% standard deviation change in four measurable health factors:
- Physical health index
- Self-reported health
- Mental health
- Probability of surviving the next two years.
Anyone losing 10% of their wealth is likely to feel depressed, but they will also suffer physically.
That's why, to prepare for any changes in the market that might come our way, we need to prepare both financially and physically. Below are four steps you should take today.
Step 1: Have a plan.
You can keep the inevitable losing trades from wrecking your portfolio with two simple (and easy) methods: Use stop losses and follow proper position-sizing advice.
My team and I regularly recommend you use stops of 20%-25%. Similarly, we "position size" by recommending that you never put more than 4%-5% of your portfolio in any one investment recommendation (like a single stock or bond).
The combined strategies of trailing stops and smart position sizing ensure you never lose more than about 1% of your portfolio on any one investment... Choose your stops and stick to them.
Step 2: Spread it out.
I've written many times about the benefits of asset allocation. Distribute your portfolio among different assets classes – stocks, fixed income, cash, and chaos hedges (like precious metals). Keeping your wealth stored in a diversified mix of investable assets is the key to avoiding catastrophic losses.
You also need to consider something called correlation.
Correlation is a statistic that measures the degree in which two stocks, or sectors, move in relation to one another. Any correlation must fall between -1 and 1.
Positive correlation means the two assets move in the same direction together. For instance, when the price of fuel increases, so do the prices of airline tickets. Negative correlation means the assets move in opposite directions. So, if stocks fall, gold tends to rise.
If you want to see the correlation between securities, try the calculator at InvestSpy. And remember, we like to use utilities as a good balance.
Step 3: Make time to reduce stress.
We like to balance our health and wealth recommendations for a simple reason: to help you live a well-rounded life. You want to stay healthy in retirement to enjoy your hard-earned wealth.
That's why our third step here is to take care of yourself. Stress reduction leads to better sleep and better cognition. You make better, more informed decisions and don't give in to the emotionally charged news stories about a pending crash.
Some of my favorite ways to calm anxiety and lower my stress include:
- A quiet cup of tea (I like Bigelow brand)
- Meditation
- A nice 30-minute walk
- Improve your sleep hygiene
- Listening to music (classical helps me focus)
Try to work one or all of these tips into your daily routine for a better, more focused outlook. Calm investors are better investors.
Step 4: Prepare with our special webinar.
Volatility like we've seen in the past few days comes with the last surge of the bull market. That's why my friend Steve Sjuggerud is hosting a special webinar focused on how to invest during these last months of the biggest bull market in history.
Steve has a proprietary computer system he uses to monitor signals across the market, which gives him a complete picture of what's really happening. He knows what you should do right now and how not to panic... no matter what the market does.
Don't miss his Melt Up Webinar on October 24. Sign up right here to get your seat.
What We're Reading...
- Here's the answer to the top question everyone's asking.
- Try the InvestSpy calculator here.
- In case you missed it: More on investing across sectors.
- Something different: Death to American cheese?
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
October 16, 2018