On Your Mind… GMOs, Stop Losses, and Asset Allocation

One thing that keeps the Health & Wealth Bulletin team going each week is seeing an inbox full of your questions.

And that’s exactly what we’ve been seeing lately…So today, we’re getting straight into some of the topics on your mind.

As always, keep sending us your questions, comments, and topic suggestions. We read every e-mail… [email protected].

Q: Do your asset allocation rules apply to every investment? For example, would I put the same percentage of my portfolio in a fund that I’d put in a stock? – C.B.

A: In my asset-allocation guide, I explain how to 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.

But don’t forget the importance of position sizing for individual securities. Most of the time, I recommend subscribers put no more than 4% to 5% of their portfolio in any one position. Some investments are safe to put more in, and others less. But in general, I prefer the 4% to 5% rule.

In the case of funds, they’re already diversified within the class they invest in – they give you instant diversification. And depending on your tolerance for risk from a sector, you could have anywhere from 5% to 20% of your investments in a closed-end fund.

Q: Do I calculate dividends into my stops? – D.R.

A: When you’re buying shares of a stock, it’s important to factor dividends into your trailing stop loss.

That’s because dividend payments change the point at which you would have to close your position.

Let me show you an example…

If you’re buying a stock for $10 and set a 25% trailing stop, you would sell the stock when the price falls 25% lower than $10 (down to $7.50). If the price moves to $20, your new stop would be $15.

Let’s say you received a $1 dividend payment. All you need to do is subtract that $1 dividend from the highest share price – $20 in this case. Then you use that number – $19 ($20 minus $1) – to set your stop loss. So your stop would move from $15 to $14.25 ($19 times 75%).

As you can see, dividends give you a little more downside protection.

Q: Where do you fall on the GMOs argument? Should we avoid them? – R.F.

A: Genetically modified organisms (GMOs) are organisms that have had their genetic material changed using genetic engineering techniques. The most common example are seen in crops like corn and soybeans that are “Roundup Ready.” That means their genes have been altered to make them resistant to the weed killer glyphosate (the main chemical in Roundup herbicide). Other GMO foods include tomatoes and even salmon.

In addition to herbicide protection, some GMO crops are protected from insects, diseases, and pesticides. That leads to improved crop yields and more consistent crop quality. But GMOs attract a lot of controversy. Some people claim they have less nutritional value and led to an increase in the use of herbicides and pesticides. There are also theoretical dangers to humans.

The controversy regarding GMOs hit a high point in 2012, when a study was released showing pictures of rats with bodies filled with tumors… supposedly the result of GMOs. But the study was retracted a year later.

I’m not saying GMO foods are good or bad… The science and research on both sides of the GMO debate are equivocal at best. Until conclusive evidence shows that GMOs cause harm to humans, I won’t go out of my way to avoid them.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
September 25, 2020